1998 ANNUAL REPORT
For the Year Ended December 31, 1998
AGGRESSIVE GROWTH FUNDS
Founders Discovery Fund
Founders Passport Fund
Founders Frontier Fund
Founders Special Fund
GROWTH FUNDS
Founders International Equity Fund
Founders Worldwide Growth Fund
Founders Growth Fund
GROWTH-AND-INCOME FUNDS
Founders Blue Chip Fund
Founders Balanced Fund
FIXED-INCOME FUND
Founders Government Securities Fund
MONEY MARKET FUND
Founders Money Market Fund
[Logo]
Founders Funds
Growth Specialists from Dreyfus
<PAGE>
- ----------------------------------------------------
TABLE OF CONTENTS
About this Report....................... 3
A Message from Founders................. 4
AGGRESSIVE GROWTH FUNDS
Founders Discovery Fund................. 6
Statement of Investments............ 9
Founders Passport Fund.................. 12
Statement of Investments............ 15
Founders Frontier Fund.................. 18
Statement of Investments............ 21
Founders Special Fund................... 24
Statement of Investments............ 27
GROWTH FUNDS
Founders International Equity Fund...... 30
Statement of Investments............ 33
Founders Worldwide Growth Fund.......... 36
Statement of Investments............ 39
Founders Growth Fund.................... 42
Statement of Investments............ 45
GROWTH-AND-INCOME FUNDS
Founders Blue Chip Fund................. 48
Statement of Investments............ 51
Founders Balanced Fund.................. 55
Statement of Investments............ 58
FIXED-INCOME FUND
Founders Government Securities
Fund.................................. 62
Statement of Investments............ 64
MONEY MARKET FUND
Founders Money Market Fund
Statement of Investments............ 66
Statements of Assets and Liabilities.... 68
Statements of Operations................ 70
Statements of Changes in Net Assets..... 72
Financial Highlights.................... 76
Notes to Financial Statements........... 80
Report of Independent Accountants....... 86
Other Information....................... 87
<PAGE>
ABOUT THIS REPORT
HISTORICAL RETURNS
All total returns mentioned in this report account for both the change in a
Fund's per-share price and reinvestment of any dividends or capital gain
distributions made by that Fund. If your account is set up to pay out Fund
distributions rather than reinvest them, your return may differ from the figures
listed here.
The comparative indexes included with each Fund's performance chart are meant
to provide a basis for judging a Fund's performance against its peer group
and/or a specific securities market index [provided by Lipper Analytical
Services, Inc., Morgan Stanley Capital International (MSCI), and Russell]. Each
index shown accounts for both change in security price and reinvestment of any
dividends or coupon payments. The Lipper indexes reflect the expenses of
managing the mutual funds included in each index. The securities indexes are
unmanaged groups of securities; they do not reflect the costs of managing a
mutual fund. An investor may not invest in any of these indexes.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
GUIDE TO UNDERSTANDING FOREIGN
HOLDINGS OF THE FOUNDERS FUNDS
The following acronyms are used throughout the Statements of Investments to
indicate the country of origin of non-U.S. holdings:
AR Argentina
AT Austria
BR Brazil
CA Canada
DE Denmark
FI Finland
FR France
GE Germany
GR Greece
HK Hong Kong
IE Ireland
IS Israel
IT Italy
JA Japan
MX Mexico
NE Netherlands
NW Norway
PO Portugal
RU Russian Federation
SG Singapore
SP Spain
SW Sweden
SZ Switzerland
TW Taiwan
UK United Kingdom
<PAGE>
- ------------------------------------------------------
A MESSAGE FROM FOUNDERS
RICHARD W. SABO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dear Fellow Shareholder:
As we look back on the exceptional year that was 1998, one overriding theme
stands out--the world's economies, and stock markets, are more connected and
complex than ever before.
Even as the U.S. stock and bond markets peaked during the first six months of
the year, the small virus that began as the Southeast Asian financial crisis in
the summer of 1997 was steadily growing. Federal Reserve Chairman Alan Greenspan
decided against raising interest rates in the first quarter of 1998, but warned
Congress that storm clouds brewing in Asia could cause global economic problems
and eventually slow down our domestic economy.
Early in the second quarter, domestic economic data remained strong, and there
were few signs of inflation. Stocks soared, and the Dow Jones Industrial Average
(DJIA) reached a then all-time high of 9,337.97 on July 17. But careful
observers noticed a decreasing demand for U.S. exports that seemed to indicate
that Asia's troubles were beginning to slow U.S. growth. Meanwhile, both
domestic and overseas investors grew increasingly nervous about the markets and
continued their "flight to quality" into U.S. Treasuries and large, household
name stocks. This was one of the main factors behind the growth of the U.S.
markets.
By mid-summer 1998, the Asian crisis had worsened enough to infect other
economies including Russia, Latin America, and Japan. Suddenly the U.S. stock
market was caught in the maelstrom of global economic volatility, and the DJIA
lost 21% of its value by September 1.
As both the global and domestic economy threatened to stall, the Federal
Reserve intervened by cutting short-term interest rates a total of three times
in the third and fourth quarters. The interest rate cuts cushioned the U.S.
economy and also helped restore confidence to the markets. In fact, the major
U.S. stock market indexes finished 1998 with an unprecedented four years of
double-digit gains. The economy also ended the year on a very positive
note--fourth quarter gross domestic product growth was the strongest in over two
years, and inflation was at its lowest level in nearly 40 years.
SEEKING GROWTH COMPANIES
Throughout the year, we remained committed to our bottom-up, growth-oriented
investment style. This research-
4
<PAGE>
driven, company-by-company approach focuses on finding the best companies with
the fundamental strengths for potential growth in earnings.
Our investment discipline paid off in 1998's market volatility by helping us
find good growth opportunities in small-, mid-, and large-cap stocks, both in
the U.S. and overseas. As might be expected, our mid- to large-cap Funds showed
the strongest performance during 1998, largely as an outgrowth of continued
investor interest in large-company stocks. Founders' small-cap Funds suffered
under a small-cap correction from April to October, although they rallied late
in the year to post strong fourth quarter returns.
We are very proud of the recognition our Funds have earned. You can find more
detail about these ratings in the Management Overview sections that follow.
LOOKING AHEAD
One upcoming issue you may have heard about is the Year 2000, or "Y2K,"
situation, stemming from computer systems using a two-digit year in their date
logic. There is a concern that the Funds could be adversely affected if the
computer systems used by Founders and the Funds' other service providers do not
properly process date-related information beginning January 1, 2000. At
Founders, we realize the importance of Y2K readiness--it's our top technological
priority. We've been working to avoid Year 2000-related problems in our systems
and to obtain assurances from the Funds' other service providers that they are
taking similar steps. You should also be aware that issuers of securities in
which the Funds invest may be adversely affected by Y2K-related problems, which
could have an impact on the value of the Funds' investments and their share
prices.
We value our relationship with you and will be doing our best to provide
excellent service in the Year 2000 and beyond.
In terms of the investment climate, we are optimistic about the overall
prospects for the U.S. economy and the stock market during 1999. At the same
time, we recognize that there may be periods of stock price volatility as a
byproduct of lower corporate earnings. Moreover, equity returns may be lower
than the spectacular highs we've seen recently. We recommend periodic reviews of
your investments to make sure that they continue to be consistent with your
objectives and risk tolerance.
Thank you for your continued confidence in Founders Funds.
Sincerely,
/s/ RICHARD W. SABO
Richard W. Sabo
President and Chief Executive Officer
Founders Asset Management LLC
5
<PAGE>
FOUNDERS DISCOVERY FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
Since Inception
1 Year 5 Years (12/31/89)
------ ------- ---------------
14.19% 13.42% 17.91%
*PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
FOUNDERS RUSSELL LIPPER SMALL CONSUMER
DISCOVERY 2000 CAP. FUND PRICE
FUND INDEX INDEX INDEX
--------- -------- ------------ --------
12/31/89.... $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/90.... $ 11,317 $ 8,051 $ 8,622 $ 10,610
12/31/91.... $ 18,389 $ 11,757 $ 12,806 $ 10,936
12/31/92.... $ 21,177 $ 13,922 $ 14,238 $ 11,251
12/31/93.... $ 23,469 $ 16,548 $ 16,643 $ 11,561
12/30/94.... $ 21,649 $ 16,247 $ 16,562 $ 11,870
12/29/95.... $ 28,431 $ 20,871 $ 21,800 $ 12,171
12/31/96.... $ 34,464 $ 24,317 $ 24,930 $ 12,576
12/31/97.... $ 38,582 $ 29,756 $ 28,683 $ 12,790
12/31/98.... $ 44,055 $ 28,996 $ 28,440 $ 13,033
MANAGEMENT OVERVIEW
A DISCUSSION WITH PORTFOLIO MANAGER
ROBERT AMMANN
HOW DID DISCOVERY FUND PERFORM DURING 1998?
Worldwide economic uncertainty led to a year characterized by a
"flight-to-quality" into large-cap stocks. While large-cap indexes like the
Standard & Poor's 500 posted very strong performance (up 28.57%), small-cap
indexes like the Russell 2000 finished down for the year.
Fortunately, the fourth quarter saw the bottom of a small-cap correction,
which began in April 1998 and ended October 8, 1998. We are pleased to report
the Discovery Fund posted a 1998 total return of 14.19%, strongly outperforming
the -2.55% return of the Russell 2000.
WHAT FACTORS INFLUENCED SMALL COMPANIES THIS YEAR?
During the first half of the year, continuing concerns about Southeast Asia
drove many investors into large-cap stocks. Although there was a valuation gap
between large- and small-cap stocks, earnings growth among select small
companies exceeded earnings growth in large companies. Small company
6
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earnings actually held up better than large caps, partially because they had
less international exposure than large caps.
TOP 10 HOLDINGS
--------------------------------------------
1. Zoran Corporation 2.86%
2. REMEC, Inc. 2.39%
3. American Bank Note Holographics,
Inc. 2.03%
4. Hanger Orthopedic Group, Inc. 2.02%
5. Zomax Optical Media, Inc. 1.95%
6. Computer Management Sciences,
Inc. 1.94%
7. Cinar Corporation Class B
Sponsored ADR 1.92%
8. ResortQuest International, Inc. 1.82%
9. Macrovision Corporation 1.82%
10. 4Front Technologies, Inc. 1.78%
--------------------------------------------
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
As the global economy grew increasingly troubled during the third quarter,
large, multinational corporations and some smaller companies felt the spillover
effects and reported weaker earnings. The Federal Reserve's short-term interest
rate cuts during the third and fourth quarters did help stabilize some of the
troubled economies around the world, and we saw a rebound in small-cap stocks
during the fourth quarter.
HOW DID YOU POSITION THE PORTFOLIO TO PURSUE GROWTH?
During the first half of the year, our consumer cyclical companies were
beneficiaries of a solid U.S. economy and strong consumer spending. These
companies had the ability to post strong earnings growth in an uncertain global
environment. Companies like O'Reilly Automotive, Inc. and DM Management Company
were strong performers in the first half of the year, as their earnings growth
was unaffected by the global economic issues. But as the year advanced,
consumers became more cautious. We felt the strength in consumer cyclicals had
run its course by the third quarter, and we became more defensive about these
issues.
PORTFOLIO AT A GLANCE
--------------------------------
TOTAL ASSETS: $241.1 million
NAV ON DECEMBER 31, 1998: $24.37
EXPENSE RATIO: 1.55%
INCEPTION DATE: 12/31/89
--------------------------------
We also used our bottom-up approach to fine-tune our technology holdings
throughout the year as we evaluated the Asian crisis. We began the year with
most of our technology holdings concentrated in small software and service
companies that did not need to rely on international markets for rapid earnings
growth. As the year progressed, we increased our weighting by buying many
hardware-oriented issues as they began to see an improving growth outlook from
international economies that had started to stabilize late in the year.
A dominant investment theme throughout the year was pharmaceutical
outsourcing. Pharmaceutical companies are increasingly looking to focus their
efforts on drug discovery, and seek other companies
7
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FOUNDERS DISCOVERY FUND (CONTINUED)
to help them manage the process of FDA trials, product manufacturing, marketing,
and sales. Companies in the Fund that are capitalizing on this trend include
ChiRex, Inc., a contract manufacturing organization for pharmaceutical
companies, and PAREXEL International Corporation, a clinical research
organization.
-----------------------------------------------
PORTFOLIO COMPOSITION
Technology .......... 36.9%
Cash & Equivalents... 9.3%
Telecom Services .... 0.7%
Consumer Cyclicals .. 22.9%
Healthcare .......... 15.0%
Consumer Staples .... 6.7%
Energy .............. 0.3%
Capital Goods ....... 8.2%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
-------------------------------------------------
Another theme that is visible in the portfolio is the opportunity presented by
digital consumer electronics. This is demonstrated by stocks that should benefit
from the rapid adoption of DVDs, or digital video disks. Zoran Corporation is a
semiconductor chip company that sells its products to leading manufacturers of
DVDs and audio components.
WHAT DO YOU SEE AHEAD FOR SMALL-CAP STOCKS THIS YEAR?
We're optimistic about the positive relative performance in the small-cap sector
for three reasons. First, many small caps have posted better earnings growth
than large-cap companies over the last six quarters. Second, small-cap stocks,
which historically have traded at a premium to large caps, are still trading at
a discount. And finally, small caps historically have performed well following a
cut in interest rates such as we saw during the last half of 1998.
GIVEN YOUR OUTLOOK, HOW WILL YOU POSITION THE FUND DURING 1999?
Themes that emerge out of our bottom-up stock picking process will continue to
allow us to leverage our cumulative research into new ideas that can capitalize
on the same attractive industry or market dynamics.
/s/ ROBERT AMMANN
Robert Ammann, CFA
Portfolio Manager
8
<PAGE>
FOUNDERS DISCOVERY FUND STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- ----------------------------------------------------------
COMMON STOCKS (DOMESTIC)-88.8%
APPAREL-1.5%
100,000 Cutter & Buck, Inc.* $3,725,000
---------
BUSINESS SERVICES-10.6%
54,075 Insight Enterprises, Inc.* 2,751,066
73,875 The Metzler Group, Inc.* 3,592,172
95,000 NCO Group, Inc.* 4,275,000
75,000 PC Connection, Inc.* 1,331,250
110,000 Pre-Paid Legal Services, Inc.* 3,630,000
82,300 Quanta Services, Inc.* 1,815,744
75,000 RWD Technologies, Inc.* 1,612,500
145,000 Realty Information Group, Inc.* 1,830,625
86,288 USWeb Corporation* 2,265,047
130,000 United Road Services, Inc.* 2,388,750
---------
25,492,154
---------
COMPUTER EQUIPMENT-0.8%
150,000 HMT Technology Corporation* 1,912,500
---------
COMPUTER SOFTWARE/SERVICES-14.1%
395,000 4Front Technologies, Inc.* 4,295,625
100,000 ARIS Corporation* 1,175,000
67,500 Best Software, Inc.* 1,603,125
50,000 BindView Development Corporation* 1,362,500
125,000 Brio Technology, Inc.* 2,171,875
275,000 Computer Management Sciences, Inc.* 4,675,000
30,000 Concord Communications, Inc.* 1,710,000
80,000 Datastream Systems, Inc.* 900,000
32,575 Documentum, Inc.* 1,740,727
100,000 Exchange Applications, Inc.* 1,950,000
430,000 Information Advantage, Inc.* 3,225,000
20,000 Mobius Management Systems* 287,500
87,500 Peregrine Systems, Inc.* 4,052,344
66,000 Pinnacle Systems, Inc.* 2,326,500
50,000 TSI International Software Limited* 2,412,500
---------
33,887,696
---------
SHARES MARKET VALUE
- ----------------------------------------------------------
CONSUMER SERVICES-3.3%
300,000 ResortQuest International, Inc.* $4,387,500
116,525 Travel Services International, Inc.* 3,481,184
---------
7,868,684
---------
ELECTRONICS-4.5%
25,000 Hutchinson Technology, Inc.* 884,375
125,000 Komag, Inc.* 1,281,250
105,000 Macrovision Corporation* 4,383,750
215,000 Read-Rite Corporation* 3,171,250
21,000 Veeco Instruments, Inc.* 1,107,750
---------
10,828,375
---------
ENVIRONMENTAL SERVICES-1.0%
68,450 IT Group, Inc.* 761,506
77,000 KTI, Inc.* 1,665,125
---------
2,426,631
---------
FOOD & BEVERAGE-2.3%
65,000 Celestial Seasonings, Inc.* 1,787,500
165,000 Horizon Resources Corporation* 2,578,125
26,000 U.S. Foodservice, Inc.* 1,274,000
---------
5,639,625
---------
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
9
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FOUNDERS DISCOVERY FUND
SHARES MARKET VALUE
- ----------------------------------------------------------
HEALTHCARE SERVICES-14.2%
82,000 American Oncology Resources, Inc.* $ 1,189,000
75,000 Boron, LePore & Associates, Inc.* 2,568,750
293,700 Capital Senior Living Corporation* 4,093,444
200,000 ChiRex, Inc.* 4,225,000
216,200 Hanger Orthopedic Group, Inc.* 4,864,500
81,250 Kendle International, Inc.* 1,899,218
125,000 Laser Vision Centers, Inc.* 2,718,750
140,000 Orthodontic Centers of America, Inc.* 2,721,250
50,225 PAREXEL International Corporation* 1,243,069
115,000 Physician Reliance Network, Inc.* 1,509,375
170,000 SteriGenics International, Inc.* 4,080,000
32,925 Sunrise Assisted Living, Inc.* 1,695,638
80,000 TLC The Laser Center, Inc.* 1,600,000
-----------
34,407,994
-----------
LEISURE & ENTERTAINMENT-4.2%
58,000 Action Performance Companies, Inc.* 2,044,500
165,000 Fairfield Communities, Inc.* 1,825,313
145,000 Hollywood Entertainment Corporation* 3,924,063
240,400 Silverleaf Resorts, Inc.* 2,238,725
-----------
10,032,601
-----------
MANUFACTURING-5.3%
280,000 American Bank Note Holographics,
Inc.* 4,900,000
250,000 AstroPower, Inc.* 2,343,750
33,500 Select Comfort Corporation* 887,750
290,000 Zomax Optical Media, Inc.* 4,712,501
-----------
12,844,001
-----------
MEDICAL SUPPLIES & EQUIPMENT-0.8%
30,650 Perclose, Inc.* 1,011,450
20,000 ResMed, Inc.* 905,000
-----------
1,916,450
-----------
PHOTOGRAPHY & IMAGING-1.4%
115,000 Analytical Surveys, Inc.* 3,406,875
-----------
SHARES MARKET VALUE
- ----------------------------------------------------------
PUBLISHING & BROADCASTING-0.5%
43,625 Pegasus Communications Corporation* $ 1,085,172
-----------
RESTAURANTS-0.8%
82,500 Dave & Buster's, Inc.* 1,892,344
-----------
RETAIL-6.9%
213,000 DM Management Company* 4,047,000
210,000 Media Arts Group, Inc.* 2,953,125
26,950 The Men's Wearhouse, Inc.* 842,188
25,000 O'Reilly Automotive, Inc.* 1,171,875
49,275 Rental Service Corporation* 773,002
26,425 Saks, Inc.* 834,039
181,350 Trans World Entertainment
Corporation* 3,445,650
90,000 Tweeter Home Entertainment Group,
Inc.* 2,587,500
-----------
16,654,379
-----------
SEMICONDUCTORS & EQUIPMENT-8.9%
82,000 Advanced Energy Industries, Inc.* 2,096,125
160,000 American Xtal Technology, Inc.* 1,450,000
125,000 Applied Micro Circuits Corporation* 4,234,375
158,125 Brooks Automation, Inc.* 2,292,813
75,000 SDL, Inc.* 2,943,750
33,450 Vitesse Semiconductor Corporation* 1,521,975
400,000 Zoran Corporation* 6,900,000
-----------
21,439,038
-----------
TELECOMMUNICATION SERVICES-0.7%
30,800 Dycom Industries, Inc.* 1,759,450
-----------
TELECOMMUNICATIONS EQUIPMENT-7.0%
105,000 Com21, Inc.* 2,205,000
475,000 Digital Microwave Corporation* 3,235,938
320,000 REMEC, Inc.* 5,760,000
230,000 Sawtek, Inc.* 4,025,000
45,050 Terayon Communication Systems
Corporation* 1,649,956
-----------
16,875,894
-----------
TOTAL COMMON STOCKS
(DOMESTIC)
(COST-$156,370,184) 214,094,863
-----------
10
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
SHARES MARKET VALUE
- ----------------------------------------------------------
COMMON STOCKS (FOREIGN)-2.2%
OIL SERVICES-0.3%
100,000 Stolt Comex Seaway SA Sponsored ADR
(UK)* $ 662,500
---------
PUBLISHING & BROADCASTING-1.9%
185,000 Cinar Corporation Class B Sponsored
ADR (CA)* 4,625,000
---------
TOTAL COMMON STOCKS (FOREIGN)
(COST-$2,291,228) 5,287,500
---------
PRINCIPAL AMOUNT AMORTIZED COST
- ------------------------------------------------------------
CORPORATE SHORT-TERM NOTES-13.5%
$ 8,200,000 Ciesco LP 5.75% 01/04/99 $ 8,196,071
8,000,000 Ford Motor Credit Company 6.09%
01/05/99 7,994,587
11,000,000 Prudential Funding Corporation 5.70%
01/06/99 10,991,291
5,300,000 Transamerica Finance Corporation
5.10% 01/04/99 5,297,748
-----------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-$32,479,697) 32,479,697
-----------
TOTAL INVESTMENTS-104.5% (COST-$191,141,109)
251,862,060
OTHER ASSETS & LIABILITIES-(4.5%)
(10,738,343)
-----------
NET ASSETS-100.0% $241,123,717
===========
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
FOUNDERS PASSPORT FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
Since Inception
1 Year 5 Years (11/16/93)
------ ------- ---------------
12.50% 8.89% 9.77%
*PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
FOUNDERS MSCI CONSUMER
PASSPORT WORLD PRICE
FUND ex US INDEX* INDEX
--------- ------------ -----------
11/30/93.... $ 10,000 $ 10,000 $ 10,000
12/30/94.... $ 9,430 $ 11,505 $ 10,267
12/29/95.... $ 11,730 $ 12,819 $ 10,528
12/31/96.... $ 14,084 $ 13,698 $ 10,878
12/31/97.... $ 14,321 $ 14,008 $ 11,063
12/31/98.... $ 16,100 $ 16,635 $ 11,273
* PERFORMANCE SHOWN IS FROM 11/30/93 - 12/31/98.
MANAGEMENT OVERVIEW
A DISCUSSION WITH PORTFOLIO MANAGER
MICHAEL GERDING
HOW DID FOUNDERS PASSPORT FUND PERFORM DURING 1998?
In a year characterized by global economic volatility, investors sought the most
liquid, defensive stocks, which generally turned out to be larger-cap names. As
a result, small-cap stocks underperformed relative to large caps. Against this
backdrop, Founders Passport Fund gained 12.50% for the year.
WHAT WERE SOME OF THE FACTORS INFLUENCING INTERNATIONAL SMALL-CAP STOCKS THIS
YEAR?
For the first six months, international small-cap stocks, such as those in
Founders Passport Fund, outperformed international large caps largely on the
strength of the continuing European recovery. Small-cap stocks are sensitive to
local economies and tend to thrive in the early stages of an economic recovery.
They were also less dependent on exports, and were relatively unscathed by the
crisis in Asia.
But later in the year as economic troubles continued in Japan, Asia, Latin
America and Russia, stock markets around the world suffered dramatic swings.
Small-cap stocks
12
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underperformed relative to large-cap stocks during the economic volatility that
marked the last half of 1998.
TOP 10 HOLDINGS
---------------------------------------------
1. TelePizza SA 4.61%
2. Altran Technologies SA 3.79%
3. Marschollek, Lautenschlaeger und
Partner Pfd. 3.75%
4. Energis PLC 3.36%
5. PizzaExpress PLC 3.27%
6. Porsche Pfd. 3.20%
7. Cinar Corporation Class B
Sponsored ADR 2.85%
8. Psion PLC 2.54%
9. NetCom AB Class B 2.22%
10. Raisio Group PLC Class V 2.13%
---------------------------------------------
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
HOW DO YOU SEARCH FOR GROWTH COMPANIES?
In 1998's difficult market environment, we continued to focus on our
disciplined, company-by-company approach to investing in growth stocks. We
identified many rapidly growing small companies with the potential for
stronger-than-average real revenue and real earnings growth.
To find these companies, the international investment team uses proprietary
research, talks to analysts all over the world, and supplements this information
by visiting overseas companies. In fact, during 1998 alone, I personally visited
with more than 400 company managements to identify the premier players in a wide
range of industries.
Using our investment discipline, we continued to find many good growth
companies in Europe. The Fund was impacted by a third-quarter correction in
European stocks, but the fundamentals in the region remained sound so we
maintained our heavy weighting.
PORTFOLIO AT A GLANCE
-------------------------------
TOTAL ASSETS: $124.6 million
NAV ON DECEMBER 31, 1998 $14.93
EXPENSE RATIO: 1.52%
INCEPTION DATE: 11/16/93
-------------------------------
WHAT KIND OF GROWTH COMPANIES CAUGHT YOUR EYE?
Our top 10 holdings at year-end included several European names, including
TelePizza, the Spanish fast-food company. We remained very confident in the
prospects for this company. Marschollek, Lautenschlaeger und Partner (MLP), one
of Germany's fastest growing insurance companies, was another company that met
our growth criteria. MLP is one of the best insurance companies we can find
anywhere in the world and has been a long-time holding.
Our strongest performance came from the Fund's European telecommunications and
technology stocks, as these industries rebounded dramatically off the lows set
in the second week of October. Our holdings included growing alternative
telecommunication providers such as Global TeleSystems Group, Inc.
13
<PAGE>
FOUNDERS PASSPORT FUND (CONTINUED)
HOW DID THE ASIAN CRISIS IMPACT THE FUND'S HOLDINGS?
Earnings growth in Asia was nearly non-existent as a result of the crisis, and
because we adhered to our growth discipline, we found it very difficult to find
companies in Asia that met our criteria. Consequently, we kept our Asian
weightings low throughout the year.
-----------------------------------------
PORTFOLIO COMPOSITION
United
Kingdom ....... 19.7%
Finland ....... 3.4%
Japan ......... 5.7%
Canada ........ 3.8%
Spain ......... 5.3%
France ........ 6.1%
Other Countries 15.1%
Cash &
Equivalents ... 12.7%
Germany ....... 15.0%
Italy ......... 4.2%
Netherlands ... 5.4%
Sweden ........ 3.6%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
-----------------------------------------------
Although we believe Asia will continue to struggle to grow earnings, some
strong Asian companies may be able to show earnings growth for the first time in
two to three years. It is likely that China will once again be the relative
bright spot in Asia, although as China begins to address the problems within its
banks and state-owned enterprises, this will slightly dampen its economy.
WHAT'S YOUR OUTLOOK FOR THE COMING YEAR?
We expect to see some global slowing, with real GDP growth in the U.S. and in
Europe around the 2% level and the rest of the world slower than that. Europe
should continue to see better earnings growth than the U.S. as an outgrowth of
its own robust economic growth and from the corporate restructuring that is
taking place there.
We expect new challenges in finding growing companies, but we'll continue our
focus on those companies with unique products and market niches, as well as
those with quality managements that can
control costs.
/s/ MICHAEL GERDING
Michael Gerding, CFA
Portfolio Manager
14
<PAGE>
FOUNDERS PASSPORT FUND STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- ---------------------------------------------------------
PREFERRED STOCKS (FOREIGN)-7.0%
AUTOMOTIVE-3.2%
1,750 Porsche AG non-voting preferred (GE) $3,992,795
---------
FINANCIAL SERVICES-3.8%
8,200 Marschollek, Lautenschlaeger und
Partner AG non-voting preferred
(MLP preferred) (GE) 4,677,274
---------
TOTAL PREFERRED STOCKS
(FOREIGN)
(COST-$2,789,156) 8,670,069
---------
COMMON STOCKS (FOREIGN)-80.3%
AGRICULTURE-1.5%
47,200 Nutreco Holding NV (NE) 1,861,139
---------
AIRLINES-1.9%
64,600 Ryanair Holdings PLC Sponsored ADR
(IE)* 2,422,500
---------
AUTO PARTS & EQUIPMENT-0.5%
55,085 Haldex AB (SW) 557,272
---------
BUSINESS SERVICES-9.1%
19,550 Altran Technologies SA (FR) 4,717,778
106,475 BTG PLC (UK) 620,071
39,100 Brunel International NV (NE) 791,709
199,775 Select Appointments Holdings PLC (UK) 2,060,907
91,525 Semcon AB (SW) 756,545
30,600 Sixt AG (GE) 2,406,968
---------
11,353,978
---------
SHARES MARKET VALUE
- ---------------------------------------------------------
BUILDING MATERIALS-1.3%
46,825 Hunter Douglas NV (NE) $1,551,934
---------
COMPUTER EQUIPMENT-3.0%
5,000 Logitech International SA (SZ)* 604,296
326,375 Psion PLC (UK) 3,160,570
---------
3,764,866
---------
COMPUTER SOFTWARE/SERVICES-8.5%
53,500 Dassault Systemes SA (FR) 2,516,459
46,775 Eidos PLC Sponsored ADR (UK)* 742,553
39,900 Fuji Soft ABC, Inc. (JA) 2,033,971
6,050 IXOS Software AG (GE)* 1,340,408
260,625 JBA Holdings PLC (UK) 823,796
178,675 Misys PLC (UK) 1,301,414
60,000 Nippon System Development Company
(JA) 1,861,758
---------
10,620,359
---------
CONSTRUCTION-1.4%
40,725 IHC Caland NV (NE) 1,692,625
---------
CONSUMER PRODUCTS-4.7%
76,200 Dorel Industries, Inc. Class B (CA)* 1,230,393
73,700 Industrie Natuzzi
SPA Sponsored ADR (IT) 1,833,288
5,500 Royal Canin SA (FR) 344,612
566,000 VTech Holdings
Limited (HK) 2,469,446
---------
5,877,739
---------
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
FOUNDERS PASSPORT FUND
SHARES MARKET VALUE
- ---------------------------------------------------------
ELECTRONICS-1.5%
385 Kudelski SA (SZ)* $1,065,162
301,000 Natsteel Electronics Limited (SG) 766,182
---------
1,831,344
---------
ENVIRONMENTAL SERVICES-1.6%
58,725 Tomra Systems ASA (NW) 1,926,977
---------
FOOD & BEVERAGE-3.3%
25,200 Baron de Ley SA (SP)* 826,120
20,350 Chipita International SA (GR) 661,277
240,250 Raisio Group PLC Class V (FI) 2,657,160
---------
4,144,557
---------
HEALTHCARE SERVICES-1.3%
48,500 ICON PLC Sponsored ADR (UK)* 1,612,625
---------
LEISURE & ENTERTAINMENT-1.5%
2,501,285 Grupo Posadas SA Class A (MX)* 1,036,965
12,862 KTM Motorradholding AG (AT) 866,003
---------
1,902,968
---------
MACHINERY-1.5%
33,825 KCI Konecranes International PLC (FI) 1,536,498
44,750 Turbon International AG (GE)* 376,163
---------
1,912,661
---------
SHARES MARKET VALUE
- ---------------------------------------------------------
MANUFACTURING-1.1%
26,600 Vestas Wind Systems AS 144A (DE)*+ $1,425,231
----------
MEDICAL SUPPLIES & EQUIPMENT-0.3%
50,750 Ortivus AB Class B (SW)* 369,410
----------
OIL & GAS-0.5%
404,414 British-Borneo Oil & Gas
PLC (UK) 666,173
----------
PACKAGING-1.3%
11,725 Schmalbach Lubeca AG (GE) 1,605,892
----------
PAPER & FOREST PRODUCTS-0.4%
56,000 Aracruz Celulose SA Sponsored ADR
(BR) 448,000
----------
PHARMACEUTICALS-1.8%
38,450 Schwarz Pharma AG (GE) 2,216,502
----------
PUBLISHING & BROADCASTING-6.3%
139,025 Capital Radio PLC (UK) 1,353,343
141,850 Cinar Corporation Class B Sponsored
ADR (CA)* 3,546,250
200,625 Flextech PLC (UK)* 2,036,294
111,350 Gruppo Editoriale L'Espresso (IT) 979,188
----------
7,915,075
----------
RESTAURANTS-10.4%
56,000 Doutor Coffee Company
Limited (JA) 1,861,758
416,675 J D Wetherspoon PLC (UK) 1,241,004
305,550 PizzaExpress PLC (UK) 4,077,366
602,760 TelePizza SA (SP)* 5,742,950
----------
12,923,078
----------
16
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
SHARES MARKET VALUE
- ------------------------------------------------------------
RETAIL-5.7%
25,290 Beter Bed Holding NV (NE) $ 882,664
394,850 Bulgari SPA (IT) 2,358,718
33,800 Douglas Holding AG (GE) 2,049,715
16,525 Narvesen ASA (NW) 429,457
10,000 Ryohin Keikaku Company Limited (JA) 1,334,260
-----------
7,054,814
-----------
TELECOMMUNICATION SERVICES-7.6%
187,725 Energis PLC (UK)* 4,185,549
45,850 Global TeleSystems Group, Inc. (RU)* 2,550,406
68,000 NetCom AB Class B (SW)* 2,768,491
-----------
9,504,446
-----------
TELECOMMUNICATIONS EQUIPMENT-0.5%
61,100 Filtronic PLC (UK) 615,067
-----------
TRANSPORTATION-1.8%
18,050 Kobenhavns Lufthavne AS (DE) 2,240,761
-----------
TOTAL COMMON STOCKS
(FOREIGN)
(COST-$75,296,993) 100,017,993
-----------
PRINCIPAL AMOUNT AMORTIZED COST
- -----------------------------------------------------------
CORPORATE SHORT-TERM NOTES-12.5%
$4,000,000 Campbell Soup Company
5.00%
01/04/99 $ 3,998,333
4,400,000 Ciesco LP 5.75%
01/04/99 4,397,892
3,500,000 General Electric Capital Corporation
4.70% 01/05/99 3,498,172
3,700,000 Prudential Funding Corporation 5.70%
01/05/99 3,697,657
-----------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-$15,592,054) 15,592,054
-----------
TOTAL INVESTMENTS-99.8%
(COST-$93,678,203) 124,280,116
OTHER ASSETS &
LIABILITIES-0.2% 292,035
-----------
NET ASSETS-100.0% $124,572,151
===========
* NON-INCOME PRODUCING.
+ SECURITIES WERE ACQUIRED PURSUANT TO RULE 144A AND MAY BE DEEMED TO BE
RESTRICTED FOR RESALE.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
FOUNDERS FRONTIER FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
Since Inception
1 Year 5 Years 10 Years (1/22/87)
------ ------- -------- ---------------
5.43% 11.26% 15.75% 16.94%
*PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
FOUNDERS RUSSELL LIPPER SMALL CONSUMER
FRONTIER 2000 CAP. FUND PRICE
FUND INDEX INDEX INDEX
--------- -------- ------------ --------
12/30/88.... $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/89.... $ 14,433 $ 11,626 $ 12,106 $ 10,464
12/31/90.... $ 13,355 $ 9,360 $ 10,437 $ 11,103
12/31/91.... $ 19,946 $ 13,668 $ 15,503 $ 11,444
12/31/92.... $ 21,727 $ 16,186 $ 17,236 $ 11,774
12/31/93.... $ 25,323 $ 19,239 $ 20,148 $ 12,098
12/30/94.... $ 24,609 $ 18,889 $ 20,050 $ 12,421
12/29/95.... $ 33,721 $ 24,265 $ 26,390 $ 12,736
12/31/96.... $ 38,560 $ 28,271 $ 30,179 $ 13,160
12/31/97.... $ 40,959 $ 34,595 $ 34,722 $ 13,384
12/31/98.... $ 43,181 $ 33,711 $ 34,428 $ 13,638
MANAGEMENT OVERVIEW
A DISCUSSION WITH PORTFOLIO MANAGER
ROBERT AMMANN
HOW DID FRONTIER FUND PERFORM DURING 1998?
Performance for both the Frontier Fund and small caps in general lagged
throughout the year as investors continued to seek the surprisingly strong
earnings growth and liquidity of large caps. The fourth quarter marked the
bottom of a small-cap correction, which began in April 1998 and ended October 8,
1998. However, this was still not enough to boost the Fund's one-year
performance as much as we hoped. We ended the year with a 5.43% total return for
the period versus the Russell 2000 performance of -2.55% for the year.
WHAT PRESSURES DID THE FUND FACE?
During 1998's worldwide economic uncertainty, investors fled to the haven of
large caps for their perceived safety and liquidity. Despite the attractive
relative valuations of small-cap stocks and their stronger profit growth, small
caps continued to remain out of favor. Yet small company
18
<PAGE>
earnings actually held up better than large caps, partially because they had
less international exposure than large caps.
---------------------------------------------
TOP 10 HOLDINGS
1. King Pharmaceuticals, Inc. 3.78%
2. Viatel, Inc. 2.88%
3. Reinsurance Group of America,
Inc. 2.70%
4. CKE Restaurants, Inc. 2.65%
5. Medicis Pharmaceutical
Corporation 2.46%
6. Gemstar International Group
Limited 2.43%
7. Watson Pharmaceuticals, Inc. 2.18%
8. HNC Software, Inc. 2.15%
9. American Eagle Outfitters, Inc. 2.12%
10. Action Performance Companies,
Inc. 2.10%
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
---------------------------------------------
In the third quarter, large, multinational corporations and some smaller
companies felt the spillover effects of global market turmoil and reported
weaker earnings. Stability returned after the Federal Reserve eased interest
rates aggressively during the third and fourth quarters, and small caps actually
rebounded in the fourth quarter.
Frontier Fund recovered strongly after the October lows, with a fourth quarter
total return of 26.11%, and a strong gain over the Russell 2000's fourth quarter
total return of 16.31%.
HOW DID YOU POSITION THE FUND TO PURSUE GROWTH?
We have long believed that there are tremendous values being created in the
small-cap sphere. The fact that small-cap performance has been poor for several
years relative to large caps has not deterred us -- we remain optimistic that
smaller cap stocks with higher relative growth rates will begin to attract more
attention. The key is to find
them before they're recognized by
the market.
PORTFOLIO AT A GLANCE
--------------------------------
TOTAL ASSETS: $167.4 million
NAV ON DECEMBER 31, 1998: $25.50
EXPENSE RATIO: 1.62%
INCEPTION DATE: 1/22/87
--------------------------------
During the first half of the year, we found many small-cap investment
opportunities that were benefiting from long-term demographic trends such as
the aging Baby Boom generation. This created plenty of opportunity for small
companies adept at providing new products and services. Action Performance
Companies, Inc. did well for the Fund by tapping into the growing popularity of
NASCAR racing through licensing and distributing motorsports collectibles.
As the year progressed, small-cap valuations were overextended and we trimmed
a few positions. This gave us the necessary cash position during September and
October's volatility to purchase
19
<PAGE>
FOUNDERS FRONTIER FUND (CONTINUED)
several stocks we liked as their prices dropped back into our market cap range.
WERE THERE SPECIFIC GROWTH STOCKS THAT INFLUENCED YOUR PERFORMANCE?
The healthcare services sector did well for the Fund throughout the year,
including our long-term holding Sunrise Assisted Living, Inc.
------------------------------------------
PORTFOLIO COMPOSITION
Capital Goods .... 6.1%
Cash &
Equivalents ...... 10.8%
Consumer Staples . 9.4%
Financial ........ 4.1%
Healthcare ....... 21.8%
Technology ....... 32.7%
Consumer Cyclicals 11.4%
Transportation ... 0.8%
Telecom Services . 2.9%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
-----------------------------------------------
Although there were very few protected industry areas in the small-cap market
during 1998, many U.S. companies did quite well, including those benefiting from
our aging population. For instance, assisted living centers have high occupancy
rates and continued unit expansion, and as a group, they showed strong growth.
We believe there will be continued demand for innovative pharmaceutical
products. Frontier Fund benefited from the good performance in this group,
including Watson Pharmaceuticals, Inc., Medicis Pharmaceutical Corporation, and
King Pharmaceutials, Inc., three of our top 10 positions at year-end.
WHAT DO YOU EXPECT THIS YEAR FOR SMALL CAPS?
We expect that there will be continued volatility in the financial markets, but
that the overall environment will be positive.
The valuation differential between large-and small-cap stocks is encouraging,
and small caps remain inexpensive relative to the S&P 500. These factors should
provide a favorable overall environment for small-company stocks. We are
optimistic that if the economic environment remains subdued, the strong growth
characteristics of small-cap stocks will be recognized.
/s/ ROBERT AMMANN
Robert Ammann, CFA
Portfolio Manager
20
<PAGE>
FOUNDERS FRONTIER FUND STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- ----------------------------------------------------------
COMMON STOCKS (DOMESTIC)-86.8%
AIRLINES-0.8%
40,000 SkyWest, Inc. $1,305,000
----------
BIOTECHNOLOGY-0.7%
43,950 IDEXX Laboratories, Inc.* 1,175,663
----------
BUSINESS SERVICES-8.5%
60,000 Acxiom Corporation* 1,852,500
10,200 CDW Computer Centers, Inc.* 977,925
41,025 Complete Business Solutions, Inc.* 1,384,594
12,125 Envoy Corporation* 706,281
96,700 IMRglobal Corporation* 2,846,606
19,325 Lason, Inc.* 1,124,473
40,000 Metamor Worldwide, Inc.* 990,000
18,500 ProBusiness Services, Inc.* 841,750
32,243 Sylvan Learning Systems, Inc.* 983,412
46,325 USWeb Corporation* 1,216,031
47,500 Whittman-Hart, Inc.* 1,315,156
----------
14,238,728
----------
COMPUTER SOFTWARE/SERVICES-21.2%
47,250 Check Point Software Technologies
Limited* 2,155,781
15,000 CNET, Inc.* 798,750
76,300 Computer Horizons Corporation* 2,021,950
37,125 Documentum, Inc.* 1,983,867
89,325 HNC Software, Inc.* 3,606,497
35,000 i2 Technologies, Inc.* 1,060,938
30,000 Inso Corporation* 750,000
33,500 Legato Systems, Inc.* 2,206,813
72,850 Macromedia, Inc.* 2,445,028
89,200 Mastech Corporation* 2,519,900
30,000 Mercury Interactive Corporation* 1,893,750
50,000 Rational Software Corporation* 1,318,750
20,800 Sapient Corporation* 1,162,200
170,500 Software AG Systems, Inc.* 3,090,313
91,475 Sykes Enterprises, Inc.* 2,778,553
31,050 Transaction Systems Architects, Inc.* 1,556,381
34,875 VERITAS Software Corporation* 2,085,961
45,000 Wind River Systems, Inc.* 2,109,375
----------
35,544,807
----------
SHARES MARKET VALUE
- ----------------------------------------------------------
CONSUMER PRODUCTS-2.4%
71,225 Gemstar International Group Limited* $4,073,180
----------
CONSUMER SERVICES-0.6%
40,000 Education Management Corporation* 940,000
----------
ELECTRONICS-1.3%
35,125 Sanmina Corporation* 2,186,531
----------
ENVIRONMENTAL SERVICES-3.1%
46,395 Allied Waste Industries* 1,096,082
23,150 Eastern Environmental Services, Inc.* 684,372
90,713 Safety-Kleen Corporation* 1,281,314
110,550 Superior Services, Inc.* 2,197,181
----------
5,258,949
----------
FOOD & BEVERAGE-1.4%
47,325 U.S. Foodservice, Inc.* 2,318,925
----------
HEALTHCARE SERVICES-10.4%
80,000 American Oncology Resources, Inc.* 1,160,000
50,000 Andrx Corporation* 2,537,500
11,827 Cardinal Health, Inc. 897,374
60,675 Cerner Corporation* 1,623,056
48,825 Concentra Managed Care, Inc.* 512,663
42,500 HCR Manor Care, Inc.* 1,248,438
100,625 Health Management Associates, Inc.
Class A* 2,176,016
180,700 Orthodontic Centers of America, Inc.* 3,512,356
85,000 Physician Reliance Network, Inc.* 1,115,625
49,550 Sunrise Assisted Living, Inc.* 2,551,825
----------
17,334,853
----------
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
FOUNDERS FRONTIER FUND
SHARES MARKET VALUE
- ----------------------------------------------------------
INSURANCE-4.1%
58,550 HCC Insurance Holdings, Inc. $1,031,944
64,575 Reinsurance Group of America, Inc. 4,520,250
92,250 Scottish Annuity and Life Holdings
Limited* 1,268,438
----------
6,820,632
----------
LEISURE & ENTERTAINMENT-4.1%
99,650 Action Performance Companies, Inc.* 3,512,663
43,850 Family Golf Centers, Inc.* 866,038
189,400 Lowes Cineplex Entertainment
Corporation* 1,917,675
20,950 Premier Parks, Inc.* 633,738
----------
6,930,114
----------
PHARMACEUTICALS-10.8%
30,000 IDEC Pharmaceuticals Corporation* 1,410,000
70,000 Jones Pharma, Inc. 2,550,625
242,075 King Pharmaceuticals, Inc.* 6,324,209
69,125 Medicis Pharmaceutical Corporation* 4,121,578
58,000 Watson Pharmaceuticals, Inc.* 3,646,750
----------
18,053,162
----------
PUBLISHING & BROADCASTING-1.7%
25,000 EchoStar Communications Corporation* 1,207,813
43,400 Univision Communications, Inc.* 1,570,538
----------
2,778,351
----------
SHARES MARKET VALUE
- ----------------------------------------------------------
RESTAURANTS-2.6%
150,700 CKE Restaurants, Inc. $4,436,231
----------
RETAIL-4.6%
53,350 American Eagle Outfitters, Inc.* 3,554,444
41,000 Linens 'n Things, Inc.* 1,624,625
39,925 United Rentals, Inc.* 1,322,516
30,000 Williams-Sonoma, Inc.* 1,209,375
----------
7,710,960
----------
SEMICONDUCTORS & EQUIPMENT-4.2%
5,000 Broadcom Corporation* 601,875
25,000 Lattice Semiconductor Corporation* 1,146,875
34,125 Microchip Technology, Inc.* 1,258,359
58,925 SIPEX Corporation* 2,069,741
14,525 Uniphase Corporation* 1,007,672
22,000 Vitesse Semiconductor Corporation* 1,001,000
----------
7,085,522
----------
TELECOMMUNICATION SERVICES-2.9%
209,875 Viatel, Inc.* 4,814,008
----------
TELECOMMUNICATIONS EQUIPMENT-1.4%
60,000 Aspect Telecommunications
Corporation* 1,046,250
28,775 RF Micro Devices, Inc.* 1,321,852
----------
2,368,102
----------
TOTAL COMMON STOCKS
(DOMESTIC)
(COST-$96,154,546) 145,373,718
----------
22
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
SHARES MARKET VALUE
- -----------------------------------------------------------
COMMON STOCKS (FOREIGN)-2.3%
BUILDING MATERIALS-0.7%
35,000 Hunter Douglas NV (NE) $ 1,160,015
-----------
CONSTRUCTION-0.8%
33,100 IHC Caland (NE) 1,375,713
-----------
PUBLISHING & BROADCASTING-0.8%
136,175 Flextech PLC (UK)* 1,382,142
-----------
TOTAL COMMON STOCKS
(FOREIGN)
(COST-$3,509,919) 3,917,870
-----------
PRINCIPAL AMOUNT AMORTIZED COST
- -----------------------------------------------------------
CORPORATE SHORT-TERM NOTES-9.6%
$5,700,000 Ciesco LP 5.75%
01/04/99 $ 5,697,269
5,000,000 Ford Motor Credit Company 4.95%
01/06/99 4,996,563
5,300,000 Progress Capital Holdings, Inc. 5.15%
01/05/99 5,296,967
-----------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-$15,990,799) 15,990,799
-----------
TOTAL INVESTMENTS-98.7% (COST-$115,655,264)
165,282,387
OTHER ASSETS &
LIABILITIES-1.3% 2,140,507
-----------
NET ASSETS-100.0% $167,422,894
===========
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
FOUNDERS SPECIAL FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
1 Year 5 Years 10 Years 20 Years
------ ------- -------- ----------
-1.73% 9.54% 15.00% 15.84%
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
FOUNDERS S&P S&P LIPPER CAP CONSUMER
SPECIAL MIDCAP 400 500 APPREC. FUND PRICE
FUND INDEX* INDEX INDEX INDEX
--------- ---------- ------------ ------------- --------
12/30/88.... $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/89.... $ 13,919 $ 12,830 $ 13,554 $ 10,464 $ 13,163
12/31/90.... $ 12,469 $ 11,831 $ 12,860 $ 11,103 $ 12,755
12/31/91.... $ 20,408 $ 16,273 $ 19,304 $ 11,444 $ 16,632
12/31/92.... $ 22,096 $ 17,504 $ 21,602 $ 11,774 $ 17,899
12/31/93.... $ 25,635 $ 20,260 $ 24,618 $ 12,098 $ 19,701
12/30/94.... $ 24,375 $ 19,763 $ 23,734 $ 12,421 $ 19,958
12/29/95.... $ 30,639 $ 26,003 $ 31,079 $ 12,736 $ 27,447
12/31/96.... $ 35,339 $ 29,894 $ 37,039 $ 13,160 $ 33,738
12/31/97.... $ 41,136 $ 35,830 $ 48,985 $ 13,384 $ 44,987
12/31/98.... $ 40,429 $ 42,985 $ 57,927 $ 13,638 $ 57,845
* BEGINNING WITH THIS ANNUAL REPORT, THE SPECIAL FUND'S PERFORMANCE WILL BE
COMPARED TO THE S&P MIDCAP 400 INDEX INSTEAD OF THE S&P 500 INDEX. WE BELIEVE
THAT THE NEW INDEX PROVIDES A BETTER COMPARISON FOR THE FUND'S INVESTMENT
PERFORMANCE THAN THE S&P 500 INDEX; WHICH INCLUDES MANY COMPANIES WITH LARGER
MARKET CAPITALIZATIONS THAN THOSE IN WHICH THE FUND GENERALLY INVESTS. FOR
YOUR INFORMATION, BOTH INDEXES ARE PRESENTED IN THE GRAPH ABOVE.
MANAGEMENT OVERVIEW
A DISCUSSION WITH PORTFOLIO MANAGER
PAUL LAROCCO
HOW DID SPECIAL FUND PERFORM IN 1998?
To pursue our investment objective of capital appreciation, Special Fund has the
flexibility to invest in the best growth companies, regardless of their size. We
felt the mid-cap range showed better relative earnings growth and more
attractive valuations than large caps, and therefore weighted our portfolio
toward mid caps. However, large-cap stocks continued to dominate the market
during the year. In addition, the Fund significantly reduced its weighting of
foreign companies in order to focus more on U.S. equities. Although we believe
these changes better position the Fund going forward, performance suffered in
the interim, and Founders Special Fund returned a disappointing -1.73% for the
one-year period ended December 31, 1998.
WHAT KIND OF GROWTH INVESTMENT OPPORTUNITIES DID YOU IDENTIFY?
Using our bottom-up strategy, Special Fund focuses on "new idea"
companies -- mostly mid-capitalization companies that deliver
24
<PAGE>
growth through new products, new services, or new ways of approaching their
business to enable them to potentially capture market share. We seek companies
growing 20% or better with sustainable earnings growth.
TOP 10 HOLDINGS
---------------------------------------------
1. Total Renal Care Holdings, Inc. 3.58%
2. Citrix Systems, Inc. 2.95%
3. Fiserv, Inc. 2.50%
4. Linens 'n Things, Inc. 2.43%
5. Starbucks Corporation 2.38%
6. Tyco International Ltd. 2.33%
7. CKE Restaurants, Inc. 2.23%
8. Mylan Laboratories, Inc. 2.15%
9. Compuware Corporation 2.10%
10. Medicis Pharmaceutical
Corporation 2.05%
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
---------------------------------------------
In the first half of the year, we shifted the focus of the Fund to faster
growing names, including healthcare services companies that were poised to
benefit from the aging population and their need for better quality healthcare
at lower cost.
A new holding in the healthcare area included Biogen, Inc., a biotechnology
company with a leading medical treatment for multiple sclerosis. We were also
excited about clinical research organizations -- CROs -- like PAREXEL
International Corporation and Quintiles Transnational Corporation. These
healthcare services stocks are benefiting from increased outsourcing by
pharmaceutical companies.
At year-end we also had a significant position in generic drugs, with holdings
in Mylan Laboratories, Inc., and Teva Pharmaceutical Industries Limited. We
believe these companies are well situated to benefit from the dramatic growth in
generic drugs expected in the next few years as many branded products go
off-patent.
PORTFOLIO AT A GLANCE
------------------------------
TOTAL ASSETS: $252.9 million
NAV ON DECEMBER 31, 1998 $7.44
EXPENSE RATIO: 1.33%
INCEPTION DATE: 9/8/61
------------------------------
During the fall market correction, we sold several stocks with diminishing
growth prospects and used that cash to add stocks showing price weakness despite
strong fundamentals. Specifically, we reduced our exposure to financial services
stocks, especially those involved in lower-quality consumer loans, since it
seemed the risk of defaults could be rising. We also carefully analyzed third
quarter earnings reports to identify companies that were demonstrating
revenue-driven growth and that we believed would perform well going forward.
This led us to invest in a number of growing technology stocks, particularly
PC-related companies such as Compaq Computer Corporation and Micron
Electronics, Inc. Demand for these companies' products had increased during
1998, and we watched them closely to gauge their market-share gains and
sustainability of growth.
25
<PAGE>
FOUNDERS SPECIAL FUND (CONTINUED)
As many high-growth mid-cap stock prices dropped dramatically in price last
fall, we added to our retail exposure through investments in companies such as
Starbucks Corporation. We also took advantage of growth in the housing market by
increasing our position in Linens 'n Things, which sells home textiles,
housewares, and home accessories.
------------------------------------------
PORTFOLIO COMPOSITION
Healthcare .......... 22.8%
Energy .............. 0.9%
Capital Goods ....... 6.0%
Technology .......... 37.1%
Consumer Cyclicals... 11.8%
Cash &
Equivalents ........ 3.0%
Utilities ........... 1.0%
Financial ........... 5.1%
Consumer Staples .... 12.3%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
------------------------------------------
At period end, we also owned Abercrombie & Fitch Company, and American Eagle
Outfitters, Inc., two retailers that capture
the key demographic market of 15- to
25-year-olds.
WHAT IS YOUR OUTLOOK FOR THE STOCK MARKET?
We expect more normal growth in the stock market during 1999 than in the past
few years. We anticipate that as investors look for earnings growth, they may
move down the capitalization spectrum and consider mid-cap stocks.
HOW WILL YOU POSITION THE PORTFOLIO?
We view 1999 as an opportunity to focus on seeking additional promising
companies with good earnings growth prospects for Special Fund. We'll continue
to focus on rapidly growing companies with innovative products or services that
we believe can gain market share and have sustainable earnings growth.
/s/ PAUL LAROCCO
Paul LaRocco, CFA
Portfolio Manager
26
<PAGE>
FOUNDERS SPECIAL FUND STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- ----------------------------------------------------------
COMMON STOCKS (DOMESTIC)-93.5%
APPAREL-1.1%
45,000 Tommy Hilfiger Corporation* $2,700,000
----------
BUSINESS SERVICES-9.8%
69,000 Affiliated Computer Services, Inc.
Class A* 3,105,000
43,000 Concord EFS, Inc.* 1,822,125
123,000 Fiserv, Inc.* 6,319,125
91,000 IMRglobal Corporation* 2,678,813
69,150 The Metzler Group, Inc.* 3,362,419
114,500 Sterling Commerce, Inc.* 5,152,500
60,000 SunGard Data Systems, Inc.* 2,381,250
----------
24,821,232
----------
BIOTECHNOLOGY-2.8%
21,500 Amgen, Inc.* 2,246,750
112,500 BioChem Pharma, Inc.* 3,220,313
27,000 Biomatrix, Inc.* 1,572,750
----------
7,039,813
----------
COMPUTER EQUIPMENT-5.5%
60,000 Apple Computer, Inc.* 2,456,250
100,000 Compaq Computer Corporation 4,193,750
94,000 Maxtor Corporation* 1,321,875
127,750 Micron Electronics, Inc.* 2,203,688
74,000 Seagate Technology, Inc.* 2,238,500
17,500 Sun Microsystems, Inc.* 1,497,344
----------
13,911,407
----------
COMPUTER SOFTWARE/SERVICES-12.9%
137,500 AXENT Technologies, Inc.* 4,245,313
77,000 Citrix Systems, Inc.* 7,469,000
68,000 Compuware Corporation* 5,308,250
41,000 CSG Systems International, Inc.* 3,228,750
72,000 Electronics for Imaging, Inc.* 2,875,500
57,000 J.D. Edwards & Company* 1,617,375
58,000 Network Associates, Inc.* 3,846,125
136,500 Platinum Technology, Inc.* 2,619,094
50,000 Verity, Inc.* 1,321,875
----------
32,531,282
----------
SHARES MARKET VALUE
- ----------------------------------------------------------
CONSUMER PRODUCTS-0.5%
40,000 Blyth Industries, Inc.* $1,250,000
----------
CONSUMER SERVICES-0.3%
50,000 Fingerhut Companies, Inc. 771,875
----------
ELECTRONICS-3.0%
35,000 Jabil Circuit, Inc.* 2,611,875
183,500 Read-Rite Corporation* 2,706,625
36,000 Sanmina Corporation* 2,241,000
----------
7,559,500
----------
ENVIRONMENTAL SERVICES-2.1%
144,500 Republic Services, Inc.* 2,664,219
54,500 Waste Management, Inc. 2,541,063
----------
5,205,282
----------
FINANCIAL SERVICES-3.7%
107,000 Associates First Capital Corporation
Class A 4,534,125
56,500 The FINOVA Group, Inc. 3,047,469
35,500 Nationwide Financial Services, Inc. 1,834,906
----------
9,416,500
----------
HEALTHCARE SERVICES-12.6%
34,500 Biogen, Inc.* 2,859,188
66,000 Cardinal Health, Inc. 5,007,750
74,500 ChiRex, Inc.* 1,573,813
125,000 HEALTHSOUTH Corporation* 1,929,688
55,000 PAREXEL International Corporation* 1,361,250
130,000 Pharmaceutical Product Development,
Inc.* 3,908,125
69,550 Quintiles Transnational Corporation* 3,707,884
88,500 Renal Care Group, Inc.* 2,566,500
306,000 Total Renal Care Holdings, Inc.* 9,046,125
----------
31,960,323
----------
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
FOUNDERS SPECIAL FUND
SHARES MARKET VALUE
- -----------------------------------------------------------
INSURANCE-1.3%
112,893 Conseco, Inc. $ 3,450,292
-----------
LEISURE & ENTERTAINMENT-1.0%
67,700 Royal Caribbean Cruises Limited 2,504,900
-----------
MANUFACTURING-2.3%
78,000 Tyco International Limited 5,884,125
-----------
MEDICAL SUPPLIES & EQUIPMENT-2.1%
112,500 PSS World Medical, Inc.* 2,580,469
99,500 Sybron International Corporation* 2,705,156
-----------
5,285,625
-----------
OIL SERVICES-0.8%
73,500 Halliburton Company 2,177,438
-----------
PHARMACEUTICALS-4.2%
87,000 Medicis Pharmaceutical Corporation* 5,187,375
172,725 Mylan Laboratories, Inc. 5,440,838
-----------
10,628,213
-----------
PUBLISHING & BROADCASTING-2.9%
47,000 Comcast Corporation Class A Special 2,758,313
71,775 Fox Entertainment Group, Inc. Class
A* 1,807,833
50,000 Tele-Communications, Inc. Class A* 2,765,625
-----------
7,331,771
-----------
RESTAURANTS-6.5%
191,125 CKE Restaurants, Inc. 5,626,242
119,500 Outback Steakhouse, Inc.* 4,750,125
107,900 Starbucks Corporation* 6,028,913
-----------
16,405,280
-----------
SHARES MARKET VALUE
- -----------------------------------------------------------
RETAIL-9.5%
57,000 Abercrombie & Fitch Company* $ 4,032,750
41,000 American Eagle Outfitters, Inc.* 2,731,625
47,000 Best Buy Company, Inc.* 2,884,625
42,825 Fred Meyer, Inc.* 2,580,206
109,000 KMart Corporation* 1,669,063
155,000 Linens 'n Things, Inc.* 6,141,875
104,000 Rental Service Corporation* 1,631,500
7,525 Ticket Master
Online-CitySearch, Inc.* 428,925
58,859 United Rentals, Inc.* 1,949,704
-----------
24,050,273
-----------
SEMICONDUCTORS & EQUIPMENT-4.8%
153,000 Brooks Automation, Inc.* 2,218,500
10,000 Intel Corporation* 1,185,000
23,300 Maxim Integrated Products, Inc.* 1,016,463
40,000 Microchip Technology, Inc.* 1,475,000
35,500 Uniphase Corporation* 2,462,813
82,000 Vitesse Semiconductor Corporation* 3,731,000
-----------
12,088,776
-----------
TELECOMMUNICATIONS EQUIPMENT-2.8%
82,475 ANTEC Corporation* 1,659,809
54,000 Motorola, Inc. 3,297,375
30,675 Tellabs, Inc.* 2,103,155
-----------
7,060,339
-----------
UTILITIES-1.0%
52,000 The AES Corporation* 2,463,500
-----------
TOTAL COMMON STOCKS
(DOMESTIC)
(COST-$184,831,672) 236,497,746
-----------
28
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
SHARES MARKET VALUE
- -----------------------------------------------------------
COMMON STOCKS (FOREIGN)-3.5%
COMPUTER EQUIPMENT-1.3%
106,000 Newbridge Networks Corporation (CA)* $ 3,222,601
-----------
PHARMACEUTICALS-1.1%
70,000 Teva Pharmaceutical Industries
Limited Sponsored ADR (IS) 2,849,910
-----------
PUBLISHING & BROADCASTING-1.1%
108,000 Cinar Corporation Class B Sponsored
ADR (CA)* 2,700,401
-----------
TOTAL COMMON STOCKS
(FOREIGN)
(COST-$7,800,677) 8,772,912
-----------
PRINCIPAL AMOUNT AMORTIZED COST
- -----------------------------------------------------------
CORPORATE SHORT-TERM NOTES-2.0%
$5,000,000 Ciesco LP 5.25%
01/04/99 $ 4,997,813
-----------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-$4,997,813) 4,997,813
-----------
TOTAL INVESTMENTS-99.0%
(COST-$197,630,162) 250,268,471
OTHER ASSETS & LIABILITIES-1.0%
2,586,176
-----------
NET ASSETS-100.0% $252,854,647
===========
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
FOUNDERS INTERNATIONAL EQUITY FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
Since Inception
1 Year (12/29/95)
------ ---------------
17.01% 17.23%
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
INTERNATIONAL MSCI
EQUITY WORLD xUS CPI
------------- --------- ---------
12/29/95............. $ 10,000 $ 10,000 $ 10,000
06/30/96............. $ 11,460 $ 10,469 $ 10,209
12/31/96............. $ 11,862 $ 10,686 $ 10,333
06/30/97............. $ 13,814 $ 11,884 $ 10,443
12/31/97............. $ 13,776 $ 10,927 $ 10,509
06/30/98............. $ 16,863 $ 12,631 $ 10,618
12/31/98............. $ 16,121 $ 12,977 $ 10,708
* PERFORMANCE SHOWN IS FROM 12/31/95 - 12/31/98.
MANAGEMENT OVERVIEW
A DISCUSSION WITH PORTFOLIO MANAGER
DOUGLAS LOEFFLER
HOW WAS INTERNATIONAL EQUITY FUND'S PERFORMANCE?
We're proud to report that Morningstar awarded the Fund a ***** overall rating,
with ***** for the 3-year period ended December 31, 1998, among 862
international equity funds. The Fund was also recognized by THE WALL STREET
JOURNAL with an "A" rating for the 3-year period ended December 31, 1998,
based on average annual total return among 316 international stock funds
reported by Lipper Analytical Services.*
For the first six months of the year, as we used our bottom-up strategy to
seek growing
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary
ratings reflect risk-adjusted performance through 12/31/98. The top 10% of the
funds in an investment category receive 5 stars. Subject to change every
month, a fund's rating is based on its 3-, 5-, and (when available) 10-year
average annual total returns (with fee adjustments) in excess of 90-day
Treasury bill returns, and a risk factor that reflects fund performance below
90-day Treasury bill returns. For the 1-year period ended 12/31/98, the Fund
received a "B" rating from THE WALL STREET JOURNAL, among the 527
international stock funds tracked by Lipper Analytical Services. In THE WALL
STREET JOURNAL'S 1/7/99 issue, an "A" rating reflected that the Fund was in
the top 20% and a "B" rating reflected that the Fund was in the top 40% of
all international stock funds, as classified by Lipper Analytical Services.
30
<PAGE>
companies throughout the world, we identified many good growth opportunities in
Europe, which boosted the Fund's performance.
TOP 10 HOLDINGS
--------------------------------------------
1. NTT Mobile
Communications Network, Inc. 3.48%
2. Cable & Wireless Communications
PLC 3.28%
3. Brisa-Auto Estradas de Portugal
SA 3.19%
4. Novartis AG Registered 3.11%
5. Altran Technologies SA 2.80%
6. DaimlerChrysler AG 2.70%
7. Pearson PLC 2.52%
8. Mannesmann AG 2.42%
9. Takefuji Corporation 2.28%
10. Danone 2.27%
--------------------------------------------
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
The last half of the year was a tumultuous period for global stock markets.
Stock markets fell sharply the first week of October, but by December, many
markets rebounded 30% or more from their early October lows. Against this
backdrop, Founders International Equity Fund finished the year with a 17.01%
total return, slightly lagging the 18.77% return of its benchmark, the MSCI
World ex U.S. Index.
WHAT IMPACT DID THE ASIAN ECONOMIC CRISIS HAVE ON THE FUND?
Early in the crisis, we started seeing several examples of the "spill-over" on
companies in the luxury goods area, and on the global demand for commodities
such as oil.
The Asian economies have made some positive steps forward, but problems still
remain and the crisis is definitely not a short-term problem. Even though we
feel moderately encouraged about the region, we have remained cautious.
PORTFOLIO AT A GLANCE
--------------------------------
TOTAL ASSETS: $18.9 million
NAV ON DECEMBER 31, 1998: $14.03
EXPENSE RATIO: 1.80%
INCEPTION DATE: 12/29/95
--------------------------------
HOW DID YOU POSITION THE FUND DURING THE YEAR?
Using our bottom-up strategy, during the first quarter we found many growing
companies in Europe, particularly in smaller countries such as Finland, Norway,
and the Netherlands. Our discipline paid off when the markets flattened out in
second quarter. Just as cream rises to the top, the better quality, high growth
companies in the International Equity Fund actually enjoyed a performance boost
during the second
quarter dip.
31
<PAGE>
FOUNDERS INTERNATIONAL EQUITY FUND (CONTINUED)
Later in the year as the markets grew more volatile, and we saw the rapid
deterioration in many companies' earnings prospects, we became more cautious in
our stock selection. In light of this volatility, we also pared back our
European cyclical holdings, and reduced our exposure to commodity-related stocks
since these were
-----------------------------------------------------
PORTFOLIO COMPOSITION
United
Kingdom ....... 15.8%
Finland ....... 8.9%
France ........ 7.7%
Italy ......... 6.3%
Portugal ...... 5.0%
Spain ......... 4.8%
Japan ......... 10.5%
Switzerland 5.0%
Other Countries 13.3%
Germany ....... 12.6%
Cash & Equivalents 1.5%
Netherlands .. 8.6%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
-----------------------------------------------------
very vulnerable to the Russian downturn. However, many of the cyclical holdings
we trimmed later rallied. Since we had previously sold off these companies, we
didn't benefit from the sharp snap-back in stock prices, and the Fund's
performance suffered. We also hadn't anticipated a sharp recovery in
non-Japanese Asian markets and were too conservative in the strong technology
sector.
As uncertainty continued regarding companies' earnings forecasts, we
concentrated the Fund on a smaller group of stocks in which we were quite
confident.
WHAT IS YOUR OUTLOOK FOR 1999?
We believe the global economy is slowing. Although we do not expect to see a
global recession, we do expect to see real GDP growth in the U.S. and in Europe
around the 2% level, with the rest of the world slower than that. Because of
expected slower economic growth, earnings growth is likely to be weaker as well.
Given these conditions, our investment philosophy becomes even more critical.
We will continue to use a bottom-up approach to invest in strong international
names with competitive market positions, innovative products, and seasoned
management.
/s/ DOUGLAS LOEFFLER
Douglas Loeffler, CFA
Portfolio Manager
32
<PAGE>
FOUNDERS INTERNATIONAL EQUITY FUND STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- -----------------------------------------------------------
PREFERRED STOCKS (FOREIGN)-2.3%
PUBLISHING & BROADCASTING-1.4%
5,600 ProSieben Media AG 144A preferred
(GE)+ $ 258,875
---------
RETAIL-0.9%
3,000 Hornbach Holding AG
preferred (GE) 178,336
---------
TOTAL PREFERRED STOCKS (FOREIGN)
(COST-$543,858) 437,211
---------
COMMON STOCKS (FOREIGN)-96.2%
AIRLINES-0.9%
7,725 Deutsche Lufthansa AG 144A (GE) 170,665
---------
AUTOMOTIVE-2.7%
5,313 DaimlerChrysler AG (GE)* 510,380
---------
AUTO PARTS & EQUIPMENT-1.0%
7,000 Continental AG (GE) 193,329
---------
BANKING-5.9%
13,500 Allied Irish Banks PLC (IE) 240,798
87,675 Banca di Roma (IT)* 148,882
3,075 Dresdner Bank AG (GE) 129,209
61,000 Merita PLC (FI) 387,929
20,000 Skandinaviska Enskilda Banken (SW) 210,968
---------
1,117,786
---------
SHARES MARKET VALUE
- -----------------------------------------------------------
BUSINESS SERVICES-4.6%
2,200 Altran Technologies SA (FR) $ 530,819
29,850 Compass Group PLC (UK) 341,958
---------
872,777
---------
COMPUTER EQUIPMENT-0.6%
4,000 Newbridge Networks Corporation (CA)* 121,500
---------
COMPUTER SOFTWARE/SERVICES-4.2%
1,525 Cap Gemini SA (FR) 244,773
5,500 Dassault Systemes SA (FR) 259,842
10,000 Konami Company Limited (JA) 289,902
---------
794,517
---------
CONSTRUCTION-3.2%
10,250 Brisa-Auto Estradas de Portugal SA
(PO) 603,314
---------
CONSUMER PRODUCTS-4.8%
3,200 Austria Tabak AG (AT) 245,647
4,925 Benckiser NV Class B (NE) 322,787
15,000 Kao Corporation (JA) 339,106
---------
907,540
---------
FINANCIAL SERVICES-5.3%
6,000 ING Groep NV (NE) 366,068
5,900 Takefuji Corporation (JA) 431,529
33,425 Unicredito Italiano SPA (IT) 198,556
---------
996,153
---------
* NON-INCOME PRODUCING.
+ SECURITIES WERE ACQUIRED PURSUANT TO RULE 144A AND MAY BE DEEMED TO BE
RESTRICTED FOR RESALE.
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
FOUNDERS INTERNATIONAL EQUITY FUND
SHARES MARKET VALUE
- -----------------------------------------------------------
FOOD & BEVERAGE-2.3%
1,500 Danone (FR) $ 429,487
---------
INSURANCE-2.8%
21,600 Alleanza Assicurazioni (IT) 305,878
28,000 Royal & Sun Alliance Insurance Group
PLC (UK) 228,630
---------
534,508
---------
LEISURE & ENTERTAINMENT-3.2%
3,460 KTM-Motorradholding AG (AT) 232,973
93,675 Ladbroke Group PLC (UK) 376,402
---------
609,375
---------
MACHINERY-4.1%
2,800 Kone Corporation B Shares (FI) 326,268
4,000 Mannesmann AG (GE) 458,626
---------
784,894
---------
OFFICE SUPPLIES & EQUIPMENT-1.0%
5,100 Oce NV (NE) 183,434
---------
OIL & GAS-1.5%
10,000 YPF Sociedad Anonima Sponsored ADR
representing one Class D share (AR) 279,375
---------
SHARES MARKET VALUE
- -----------------------------------------------------------
PAPER & FOREST PRODUCTS-0.3%
8,000 Aracruz Celulose SA Sponsored ADR
(BR) $ 64,000
---------
PHARMACEUTICALS-7.1%
6,100 Elan Corporation PLC Sponsored ADR
(IE)* 424,331
3,000 Glaxo Wellcome PLC Sponsored ADR (UK) 208,500
300 Novartis AG Registered (SZ) 589,658
2,000 Schwarz Pharma AG (GE) 115,293
---------
1,337,782
---------
PROPERTY-1.0%
31,600 Sponda Oyj 144A (FI) 185,357
---------
PUBLISHING & BROADCASTING-6.1%
23,000 Arnoldo Mondadori Editore SPA (IT) 304,781
24,000 Pearson PLC (UK) 476,406
10,075 VNU NV (NE) 380,087
---------
1,161,274
---------
34
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
SHARES MARKET VALUE
- -----------------------------------------------------------
RETAIL-6.5%
17,800 Dixons Group PLC (UK) $ 250,414
6,075 Douglas Holding AG (GE) 368,403
2,000 Ryohin Keikaku Company Limited (JA) 266,852
12,000 Superdiplo SA (SP)* 338,341
----------
1,224,010
----------
SEMICONDUCTORS & EQUIPMENT-0.6%
8,000 Taiwan Semiconductor Manufacturing
Company Limited Sponsored ADR (TW)* 113,500
----------
TELECOMMUNICATION SERVICES-21.0%
9,000 British Telecommunications PLC (UK) 135,607
68,000 Cable & Wireless Communications PLC
(UK)* 621,165
2,250 Esprit Telecom Group PLC Sponsored
ADR (UK)* 105,750
3,000 Global TeleSystems Group, Inc. (RU)* 166,875
5,125 MetroNet Communications Corporation
(CA)* 169,125
9,250 NetCom AB Class B (SW)* 376,596
16 NTT Mobile Communications Network,
Inc. (JA) 659,594
4,450 Panafon Hellenic Telecom SA 144A GDS
(GR)* 119,179
7,500 Portugal Telecom SA (PO) 343,883
22,300 Sonera Group Oyj 144A (FI)*+ 396,382
850 Swisscom AG (SZ)* 355,809
12,500 Telecom Italia SPA (IT) 106,890
21,000 Telecom Italia SPA Savings Share (IT) 132,453
2,091 Telefonica SA Sponsored ADR (SP) 283,069
----------
3,972,377
----------
SHARES MARKET VALUE
- -----------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT-2.0%
3,175 Nokia Oyj Sponsored ADR (FI) $ 382,389
----------
TRANSPORTATION-2.0%
11,500 TNT Post Group NV (NE) 370,731
----------
UTILITIES-1.5%
17,000 Union Electrica Fenosa SA (SP) 294,549
----------
TOTAL COMMON STOCKS (FOREIGN)
(COST-$14,856,601)
18,215,003
----------
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------
CORPORATE SHORT-TERM NOTES-2.0%
$380,000 Ciesco LP 5.25%
01/04/99 $ 379,834
----------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-$379,834) 379,834
----------
TOTAL INVESTMENTS-100.5%
(COST-$15,780,293) 19,032,048
OTHER ASSETS & LIABILITIES-(0.5%)
(94,541)
----------
NET ASSETS-100.0% $18,937,507
==========
* NON-INCOME PRODUCING.
+ SECURITIES WERE ACQUIRED PURSUANT TO RULE 144A AND MAY BE DEEMED TO BE
RESTRICTED FOR RESALE.
SEE NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
FOUNDERS WORLDWIDE GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
Since Inception
1 Year 5 Years (12/31/89)
------ ------- ---------------
9.63% 10.26% 13.36%
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
MSCI LIPPER
WORLDWIDE WORLD GLOBAL FD. CPI
--------- -------- ----------- ----------
12/31/89.... $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/90.... $ 10,667 $ 8,299 $ 9,076 $ 10,610
12/31/91.... $ 14,379 $ 9,816 $ 10,918 $ 10,936
12/31/92.... $ 14,596 $ 9,303 $ 10,924 $ 11,251
12/31/93.... $ 18,962 $ 11,397 $ 14,506 $ 11,561
12/30/94.... $ 18,551 $ 11,975 $ 14,191 $ 11,870
12/29/95.... $ 22,374 $ 14,454 $ 16,265 $ 12,171
12/31/96.... $ 25,494 $ 16,403 $ 18,909 $ 12,576
12/31/97.... $ 28,187 $ 18,986 $ 21,558 $ 12,790
12/31/98.... $ 30,900 $ 23,605 $ 24,712 $ 13,033
MANAGEMENT OVERVIEW
A DISCUSSION WITH PORTFOLIO MANAGER
MICHAEL GERDING
HOW DID THE FUND PERFORM DURING 1998?
Against a backdrop of global economic setbacks that jolted international
investors, Worldwide Growth Fund rose 9.63% for the one-year period ended
December 31, 1998. The Fund's underweighting in U.S. stocks relative to its
benchmark, the MSCI World Index, caused it to lag the index's gain of 24.33% for
the period. However, we were recognized for our long-term performance with a
**** overall rating from Morningstar, with **** for the 3- and 5-year periods
ended December 31, 1998 among 862 and 407 international equity funds,
respectively.*
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary
ratings reflect risk-adjusted performance through 12/31/98. The top 10% of
the funds in an investment category receive 5 stars and the next 22.5%
receive 4 stars. Subject to change every month, a fund's rating is based on
its 3-, 5-, and (when available) 10-year average annual total returns (with
fee adjustments) in excess of 90-day Treasury bill returns, and a risk factor
that reflects fund performance below 90-day Treasury bill returns.
36
<PAGE>
HOW DID WORLD EVENTS IMPACT THE FUND'S HOLDINGS?
Clearly, the Asian currency crisis and 1998's international market volatility
dominated investors' attention around the world for most of the year. During our
visits to Asia, we saw convincing evidence that the region's economies were
still troubled and that the region continued to battle significant financial
problems, including a widespread banking crisis.
TOP 10 HOLDINGS
-----------------------------------------------
1. MCI WorldCom, Inc. 3.93%
2. Marschollek, Lautenschlaeger und
Partner Pfd. 2.94%
3. NTT Mobile
Communications Network, Inc. 2.94%
4. Brisa-Auto Estradas de Portugal
SA 2.90%
5. VNU NV 2.56%
6. Compass Group PLC 2.40%
7. Jacor Communications, Inc. 2.35%
8. Oce NV 2.30%
9. Danone 2.26%
10. Pearson PLC 2.20%
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
-----------------------------------------------
By the latter half of the year, the Asian crisis had spread, impacting other
emerging markets including Latin America and Russia. Stock markets around the
world suffered dramatic swings in the third quarter regardless of their
fundamentals. In the midst of this volatility, the Federal Reserve intervened by
cutting short-term interest rates three times during the third and fourth
quarters.
WHAT INVESTMENT TACTICS HELPED THE FUND?
Using our bottom-up stock picking approach, we continued to find many good
investment opportunities in Europe. European companies were growing more
quickly, and at better valuations, than their counterparts in the United States
and around the world. One positive result of 1998's market volatility was the
fact that many good quality European companies with strong earnings and solid
fundamentals became much more reasonably valued.
PORTFOLIO AT A GLANCE
--------------------------------
TOTAL ASSETS: $272.1 million
NAV ON DECEMBER 31, 1998: $22.06
EXPENSE RATIO: 1.47%
INCEPTION DATE: 12/31/89
--------------------------------
We also found strong growth opportunities in the United States. However, we
were cautious about U.S. companies based on our concerns about company
valuations relative to their growth rates. We felt the valuations of many U.S.
companies were overextended particularly when comparing U.S. companies to their
European counterparts. We saw indications of this at a company-by-company level.
37
<PAGE>
FOUNDERS WORLDWIDE GROWTH FUND (CONTINUED)
But the third quarter correction allowed us to find more reasonably priced
growth ideas among U.S. companies, and we added several U.S. names to the
portfolio including Parametric Technology Corporation and CheckFree Holdings
Corporation. This was the first time in quite awhile that we actually increased
our U.S. exposure.
------------------------------------------------
PORTFOLIO COMPOSITION
United
Kingdom ............ 13.7%
Netherlands ........ 10.1%
Japan .............. 9.7%
France ............. 4.1%
Switzerland ........ 3.4%
Portugal ........... 3.8%
Spain .............. 2.7%
Cash & Equivalents.. 2.2%
Other Countries .... 9.1%
United States ...... 22.8%
Germany ............ 13.4%
Italy .............. 5.0%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
------------------------------------------------
We were also able to find several Japanese companies with reasonable
valuations and our weighting there was 9.7% at the end of the year.
Because we adhered to our growth discipline seeking only companies that are
growing their businesses, we had a minimal exposure to non-Japan Asia at
year-end. Most businesses in Asia were shrinking and we expect most of the
economies in the region will continue to shrink in 1999.
WHAT IS YOUR OUTLOOK FOR 1999?
We believe this new year may see slower economic growth and weaker earnings
growth as well. The U.S. is likely to see lower earnings growth. Europe, on the
other hand, should continue to see better earnings growth as a byproduct of its
more robust economic growth and from the corporate restructuring that is taking
place there.
In this environment, our disciplined investment process becomes even more
important. We will continue to use hands-on research and personal visits to
focus on those companies with unique products and market niches, as well as
those with quality
38
<PAGE>
FOUNDERS WORLDWIDE GROWTH FUND SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- -----------------------------------------------------------
PREFERRED STOCKS (FOREIGN)-6.5%
AUTOMOTIVE-1.4%
77,000 Volkswagen AG non-voting preferred
(GE) $3,837,286
----------
FINANCIAL SERVICES-2.9%
14,025 Marschollek, Lautenschlaeger und
Partner AG non-voting preferred (MLP
preferred) (GE) 7,999,850
----------
PUBLISHING & BROADCASTING-1.4%
79,700 ProSieben Media AG 144A preferred
(GE)+ 3,685,100
----------
RETAIL-0.8%
34,900 Hornbach Holding AG preferred (GE) 2,074,531
----------
TOTAL PREFERRED STOCKS (FOREIGN)
(COST-$10,637,547) 17,596,767
----------
COMMON STOCKS (DOMESTIC)-22.8%
APPAREL-1.0%
118,175 Jones Apparel Group, Inc.* 2,607,236
----------
BANKING-1.1%
58,000 Citigroup, Inc. 2,871,000
----------
BUSINESS SERVICES-1.5%
159,525 Manpower, Inc. 4,018,036
----------
COMPUTER SOFTWARE/SERVICES-2.2%
48,000 J.D. Edwards & Company* 1,362,000
276,500 Parametric Technology Corporation* 4,493,125
----------
5,855,125
----------
ELECTRONICS-2.4%
84,000 CheckFree Holdings Corporation* 1,953,000
76,550 Emerson Electric Company 4,631,275
----------
6,584,275
----------
FOOD & BEVERAGE-2.0%
134,225 PepsiCo, Inc. 5,494,836
----------
SHARES MARKET VALUE
- -----------------------------------------------------------
HEALTHCARE SERVICES-2.1%
16,000 Biogen, Inc.* $1,326,000
116,000 Columbia/HCA Healthcare Corporation 2,871,000
100,000 HEALTHSOUTH Corporation* 1,543,750
----------
5,740,750
----------
PHARMACEUTICALS-0.5%
11,500 Pfizer, Inc. 1,442,531
----------
PUBLISHING & BROADCASTING-2.9%
99,175 Jacor Communications, Inc.* 6,384,391
24,000 Time Warner, Inc. 1,489,500
----------
7,873,891
----------
RETAIL-1.7%
184,200 Guitar Center, Inc.* 4,524,413
----------
SEMICONDUCTORS & EQUIPMENT-0.5%
11,500 Intel Corporation 1,362,750
----------
TELECOMMUNICATION SERVICES-3.9%
148,950 MCI WorldCom, Inc.* 10,687,163
----------
TELECOMMUNICATIONS EQUIPMENT-0.5%
22,800 Motorola, Inc. 1,392,225
----------
TRANSPORTATION-0.5%
17,000 FDX Corporation* 1,513,000
----------
TOTAL COMMON STOCKS
(DOMESTIC)
(COST-$49,657,298) 61,967,231
----------
COMMON STOCKS (FOREIGN)-68.6%
AIRLINES-1.7%
203,600 Deutsche Lufthansa AG 144A (GE) 4,499,004
----------
AUTOMOTIVE-0.9%
25,251 DaimlerChrysler AG (GE)* 2,425,674
----------
AUTO PARTS & EQUIPMENT-0.5%
51,000 Continental AG (GE) 1,408,586
----------
* NON-INCOME PRODUCING.
+ SECURITIES WERE ACQUIRED PURSUANT TO RULE 144A AND MAY BE DEEMED RESTRICTED
FOR RESALE.
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
FOUNDERS WORLDWIDE GROWTH FUND
SHARES MARKET VALUE
- -----------------------------------------------------------
BANKING-5.6%
194,000 Allied Irish Banks PLC (IE) $3,460,366
2,498,775 Banca di Roma (IT)* 4,243,194
44,000 Dresdner Bank AG (GE) 1,849,854
915,000 Merita PLC (FI) 5,818,932
----------
15,372,346
----------
BUSINESS SERVICES-4.1%
570,075 Compass Group PLC (UK) 6,530,726
750,000 WPP Group PLC (UK) 4,564,253
----------
11,094,979
----------
COMPUTER SOFTWARE/SERVICES-3.6%
28,000 Business Objects SA (FR)* 910,000
26,000 Cap Gemini SA (FR) 4,176,852
166,000 Konami Company Limited (JA) 4,812,379
----------
9,899,231
----------
CONSTRUCTION-2.9%
138,850 Brisa-Auto Estradas de Portugal SA
(PO) 7,879,207
----------
CONSUMER PRODUCTS-5.2%
36,800 Austria Tabak AG (AT) 2,823,256
76,650 Benckiser NV Class B (NE) 5,023,685
52,250 Industrie Natuzzi SPA Sponsored ADR
(IT) 1,299,719
224,000 Kao Corporation (JA) 5,063,982
----------
14,210,642
----------
ELECTRONICS-1.0%
36,000 Sony Corporation (JA) 2,626,675
----------
FINANCIAL SERVICES-5.5%
97,000 ING Groep NV (NE) 5,918,101
81,600 Takefuji Corporation (JA) 5,968,265
527,425 Unicredito Italiano SPA (IT) 3,133,090
----------
15,019,456
----------
SHARES MARKET VALUE
- -----------------------------------------------------------
FOOD & BEVERAGE-2.3%
21,450 Danone (FR) $6,145,900
----------
INSURANCE-1.2%
407,350 Royal & Sun Alliance Insurance Group
PLC (UK) 3,326,304
----------
LEISURE & ENTERTAINMENT-1.9%
1,286,225 Ladbroke Group PLC (UK) 5,168,642
----------
MACHINERY-1.9%
45,250 Mannesmann AG (GE) 5,189,570
----------
OFFICE SUPPLIES & EQUIPMENT-2.3%
174,000 Oce NV (NE) 6,258,326
----------
OIL & GAS-2.1%
205,500 YPF Sociedad Anonima Sponsored ADR
representing one Class D share (AR) 5,741,156
----------
PHARMACEUTICALS-5.3%
84,000 Elan Corporation PLC Sponsored ADR
(IE)* 5,843,250
2,205 Novartis AG Registered (SZ) 4,335,569
60,000 Schwarz Pharma AG (GE) 3,458,781
16,000 Teva Pharmaceutical Industries
Limited Sponsored ADR (IS) 651,000
----------
14,288,600
----------
PUBLISHING & BROADCASTING-5.3%
116,000 Arnoldo Mondadori Editore SPA (IT) 1,537,153
301,550 Pearson PLC (UK) 5,985,843
184,450 VNU NV (NE) 6,958,523
----------
14,481,519
----------
40
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
SHARES MARKET VALUE
- -----------------------------------------------------------
RETAIL-2.8%
336,875 Dixons Group PLC (UK) $ 4,739,231
106,750 Superdiplo SA (SP)* 3,009,827
-----------
7,749,058
-----------
SEMICONDUCTORS & EQUIPMENT-0.4%
75,000 Taiwan Semiconductor Manufacturing
Company Limited Sponsored ADR (TW)* 1,064,063
-----------
TELECOMMUNICATION SERVICES-9.2%
226,000 British Telecommunications PLC (UK) 3,404,826
84,975 MetroNet Communications Corporation
(CA)* 2,804,175
194 NTT Mobile Communications Network,
Inc. (JA) 7,997,581
56,000 Portugal Telecom SA (PO) 2,567,656
12,000 Swisscom AG (SZ)* 5,023,662
393,000 Telecom Italia SPA (IT) 3,360,619
-----------
25,158,519
-----------
SHARES MARKET VALUE
- ------------------------------------------------------------
TRANSPORTATION-1.3%
106,000 TNT Post Group NV (NE) $ 3,417,168
-----------
UTILITIES-1.6%
250,000 Union Electrica Fenosa SA (SP) 4,331,600
-----------
TOTAL COMMON STOCKS
(FOREIGN)
(COST-$142,559,394) 186,756,225
-----------
PRINCIPAL AMOUNT AMORTIZED COST
- ------------------------------------------------------------
CORPORATE SHORT-TERM NOTES-3.2%
$8,800,000 Ciesco LP 5.25% 01/04/99 $ 8,796,150
-----------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-$8,796,150) 8,796,150
-----------
TOTAL INVESTMENTS-101.1%
(COST-$211,650,389) 275,116,373
OTHER ASSETS & LIABILITIES-(1.1%)
(3,062,983)
-----------
NET ASSETS-100.0% $272,053,390
===========
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
FOUNDERS GROWTH FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
1 Year 5 Years 10 Years 20 Years
------ ------- -------- --------
25.04% 21.02% 20.30% 18.73%
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
LIPPER CONSUMER
GROWTH GROWTH FUND PRICE
FUND S&P 500 INDEX INDEX
--------- -------- ------------ ---------
12/30/88.... $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/89.... $ 14,176 $ 13,163 $ 12,747 $ 10,464
12/31/90.... $ 12,673 $ 12,755 $ 12,056 $ 11,103
12/31/91.... $ 18,680 $ 16,632 $ 16,436 $ 11,444
12/31/92.... $ 19,485 $ 17,899 $ 17,690 $ 11,774
12/30/93.... $ 24,460 $ 19,701 $ 19,808 $ 12,098
12/31/94.... $ 23,643 $ 19,958 $ 19,496 $ 12,421
12/29/95.... $ 34,418 $ 27,447 $ 25,858 $ 12,736
12/31/96.... $ 40,122 $ 33,738 $ 30,378 $ 13,160
12/31/97.... $ 50,788 $ 44,987 $ 38,907 $ 13,384
12/31/98.... $ 63,499 $ 57,845 $ 44,580 $ 13,638
MANAGEMENT OVERVIEW
A DISCUSSION WITH CO-PORTFOLIO MANAGERS
THOMAS ARRINGTON, LEFT, AND SCOTT CHAPMAN
HOW DID FOUNDERS GROWTH FUND PERFORM DURING 1998?
Founders Growth Fund finished the year with a respectable one-year return of
25.04%, outperforming its Lipper peer group average return of 22.86% for the
period. Morningstar awarded Founders Growth Fund a **** overall rating, with ***
for the 3-year period and **** for the 5- and 10-year periods ended December 31,
1998 among 2802, 1702, and 732 domestic equity funds, respectively.*
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary
ratings reflect risk-adjusted performance through 12/31/98. The top 10% of
the funds in an investment category receive 5 stars, the next 22.5% receive 4
stars, and the next 35% receive 3 stars. Subject to change every month, a
fund's rating is based on its 3-, 5-, and (when available) 10-year average
annual total returns (with fee adjustments) in excess of 90-day Treasury bill
returns, and a risk factor that reflects fund performance below 90-day
Treasury bill returns.
42
<PAGE>
HOW DID THE ASIAN CRISIS AFFECT GROWTH FUND?
Given our concerns about the impact of the Asian crisis on technology companies,
the Fund was somewhat cautious in its technology weighting. This modest relative
weight hampered the portfolio when tech stocks boomed later in the year.
TOP 10 HOLDINGS
----------------------------------------------
1. General Electric Company 4.89%
2. Microsoft Corporation 4.67%
3. Pfizer, Inc. 3.48%
4. Intel Corporation 3.41%
5. MCI WorldCom, Inc. 2.96%
6. Lucent Technologies, Inc. 2.76%
7. Wal-Mart Stores, Inc. 2.48%
8. Berkshire Hathaway, Inc. 2.41%
9. Warner-Lambert Company 2.07%
10. International Business Machines
Corporation 2.01%
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
----------------------------------------------
HOW DID YOU SEEK GROWTH FOR THE PORTFOLIO?
Using Founders' fundamental research process, the investment team found good
investment opportunities among companies that were undergoing significant
restructuring. Examples included Cognizant Corporation, which split last summer
into two companies: IMS Health, Inc. and Nielsen Media Research.
During the summer, the Fund increased its position in several financial
services companies that were part of the spate of corporate acquisitions fueled
by the increase in stock prices. These firms benefited from the low interest
rate environment that encouraged many American consumers to make credit
purchases.
As the weakness in the foreign markets accelerated during the third quarter,
the Fund trimmed its holdings in several large, multinational consumer products
companies, and reduced its position in Citigroup, Inc., which was very exposed
to emerging markets.
PORTFOLIO AT A GLANCE
--------------------------------
TOTAL ASSETS: $2.4 billion
NAV ON DECEMBER 31, 1998: $20.41
EXPENSE RATIO: 1.08%
INCEPTION DATE: 1/5/62
--------------------------------
WHICH PARTICULAR STOCKS REALLY WORKED FOR THE FUND?
Growth Fund benefited from its holdings in strong performers in the computer and
telecommunications industries, such as America Online, Inc., MCI WorldCom, Inc.,
and Microsoft Corporation. For the one-year period ended December 31, 1998,
America Online was up an incredible 585%, MCI WorldCom was up 137%, and
Microsoft showed a gain of 115%.
43
<PAGE>
FOUNDERS GROWTH FUND (CONTINUED)
WERE THERE STOCKS THAT HURT THE FUND'S PERFORMANCE?
Some. In the third quarter, the financial securities the Fund held were impacted
by Russia's effective loan default and the near collapse of hedge fund Long Term
Capital Management LP. The Fund also made some disappointing investments in
casino
--------------------------------------------------
PORTFOLIO COMPOSITION
Healthcare ........ 17.6%
Cash &
Equivalents ...... 3.3%
Telecom Services .. 6.5%
Technology ........ 25.5%
Capital Goods ..... 7.0%
Financial ......... 12.2%
Basic Materials ... 0.3%
Consumer Cyclicals. 11.2%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
--------------------------------------------------
stocks. And, the Growth Fund held some mid-cap companies that did not keep up
with the giant-cap names that led the market higher in 1998. We were also
underweight in pharmaceuticals, a sector investors rewarded for its earnings
predictability and stability.
WHAT DO YOU EXPECT GOING FORWARD?
We're still identifying excellent growth companies at reasonable prices. We're
staying focused on seeking excellent businesses that generate cash, that are
managed by a respected owner-oriented team, have sustainable, above-average
earnings, and are attractively priced.
We believe our research will help us find companies with durable franchises,
that may be all-weather performers, that have global industry leadership with
financial strength, and that may be worth more in the future.
/s/ THOMAS ARRINGTON
Thomas Arrington, CFA
Co-Portfolio Manager
/s/ SCOTT CHAPMAN
Scott Chapman, CFA
Co-Portfolio Manager
44
<PAGE>
FOUNDERS GROWTH FUND STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- -----------------------------------------------------------
COMMON STOCKS (DOMESTIC)-95.7%
BANKING-2.7%
503,550 Citigroup, Inc. $24,925,725
149,150 Firstar Corporation 13,908,238
169,450 State Street Corporation 11,787,366
336,525 U.S. Bancorp 11,946,638
-----------
62,567,967
-----------
BIOTECHNOLOGY-1.6%
354,050 Amgen, Inc* 36,998,225
-----------
BUSINESS SERVICES-2.9%
183,700 Cintas Corporation 12,927,887
278,725 Computer Sciences Corporation* 17,960,342
508,437 Fiserv, Inc.* 26,120,951
10,525 The Interpublic Group of Companies,
Inc. 839,369
238,575 Robert Half International, Inc.* 10,661,320
------------
68,509,869
------------
CHEMICALS-0.3%
141,275 Monsanto Company 6,710,563
------------
COMPUTER EQUIPMENT-5.4%
303,625 Compaq Computer Corporation 12,733,273
420,675 Dell Computer Corporation* 30,788,152
283,600 E M C Corporation Massachusetts* 24,106,000
257,250 International Business Machines
Corporation 47,526,938
141,900 Sun Microsystems, Inc.* 12,141,319
------------
127,295,682
------------
COMPUTER NETWORKING-2.0%
501,125 Cisco Systems, Inc.* 46,510,664
------------
SHARES MARKET VALUE
- -----------------------------------------------------------
COMPUTER SOFTWARE/SERVICES-6.1%
99,325 Automatic Data Processing, Inc. $ 7,964,623
186,225 Intuit, Inc.* 13,501,313
796,125 Microsoft Corporation* 110,313,070
287,350 Oracle Corporation* 12,391,969
-----------
144,170,975
-----------
CONSUMER PRODUCTS-5.8%
50,000 The Clorox Company 5,840,625
181,950 Colgate-Palmolive Company 16,898,606
444,625 The Dial Corporation 12,838,547
801,050 Gillette Company 38,700,728
689,725 Philip Morris Companies, Inc. 36,900,288
289,000 The Procter & Gamble Company 26,389,313
-----------
137,568,107
-----------
CONSUMER SERVICES-0.6%
452,925 DeVry, Inc.* 13,870,828
-----------
DIVERSIFIED-2.4%
24,240 Berkshire Hathaway, Inc.* 56,964,000
-----------
ELECTRONICS-6.3%
1,131,225 General Electric Company 115,455,652
29,750 Perkin Elmer Corporation 2,902,484
320,475 Solectron Corporation* 29,784,145
-----------
148,142,281
-----------
FINANCIAL SERVICES-4.3%
234,125 American Express Company 23,939,281
298,912 Associates First Capital Corporation
Class A 12,666,396
114,875 The Charles Schwab Corporation 6,454,539
562,500 Fannie Mae 41,625,000
138,525 Franklin Resources, Inc. 4,432,800
140,550 Northern Trust Corporation 12,262,988
-----------
101,381,004
-----------
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE>
FOUNDERS GROWTH FUND
SHARES MARKET VALUE
- -----------------------------------------------------------
FOOD & BEVERAGE-2.7%
668,025 The Coca-Cola Company $44,674,172
97,725 Hershey Foods Corporation 6,077,273
299,600 PepsiCo, Inc. 12,264,875
9,425 Tootsie Roll Industries, Inc. 368,753
8,850 Wm. Wrigley Jr. Company 792,628
-----------
64,177,701
-----------
HEALTHCARE SERVICES-1.5%
483,600 IMS Health, Inc. 36,481,575
-----------
INSURANCE-2.9%
369,275 American International Group, Inc. 35,681,197
167,900 The Hartford Financial Services
Group, Inc. 9,213,513
395,000 Marsh & McLennan Companies, Inc. 23,082,813
-----------
67,977,523
-----------
LEISURE & ENTERTAINMENT-3.7%
280,000 America Online, Inc.* 44,800,000
143,950 Carnival Corporation
Class A 6,909,600
143,950 Harley Davidson, Inc. 6,819,631
150,025 Mattel, Inc. 3,422,445
862,350 The Walt Disney Company 25,870,500
-----------
87,822,176
-----------
MANUFACTURING-0.9%
30,525 Danaher Corporation 1,657,889
108,275 Illinois Tool Works, Inc. 6,279,950
173,150 Tyco International Limited 13,062,003
-----------
20,999,842
-----------
SHARES MARKET VALUE
- -----------------------------------------------------------
MEDICAL SUPPLIES & EQUIPMENT-1.8%
148,500 Johnson & Johnson $12,455,438
416,500 Medtronic, Inc. 30,925,125
-----------
43,380,563
-----------
PHARMACEUTICALS-12.3%
268,425 ALZA Corporation* 14,025,206
295,750 Bristol-Myers Squibb Company 39,575,047
414,250 Eli Lilly and Company 36,816,469
158,500 Merck & Company, Inc. 23,408,469
655,250 Pfizer, Inc. 82,192,922
837,800 Schering-Plough Corporation 46,288,450
649,000 Warner-Lambert Company 48,796,688
-----------
291,103,251
-----------
PUBLISHING & BROADCASTING-5.2%
639,450 Comcast Corporation Class A Special 37,527,722
183,800 Gannett Company, Inc. 11,855,100
36,025 McGraw-Hill Companies, Inc. 3,670,047
342,000 MediaOne Group, Inc.* 16,074,000
677,850 Tele-Communications, Inc. Class A* 37,493,578
260,000 Time Warner, Inc. 16,136,250
-----------
122,756,697
-----------
RESTAURANTS-1.7%
406,350 McDonald's Corporation 31,136,569
226,600 Outback Steakhouse, Inc.* 9,007,350
-----------
40,143,919
-----------
46
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
SHARES MARKET VALUE
- -------------------------------------------------------------
RETAIL-7.9%
200,225 Bed Bath & Beyond, Inc.* $ 6,820,164
109,000 Best Buy Company, Inc.* 6,689,875
356,650 Costco Companies, Inc.* 25,745,672
352,250 The Gap, Inc. 19,814,063
490,175 The Home Depot, Inc. 29,992,583
224,925 Kohl's Corporation* 13,818,830
145,025 Staples, Inc.* 6,335,780
304,350 Walgreen Company 17,823,497
719,800 Wal-Mart Stores, Inc. 58,618,713
-------------
185,659,177
-------------
SEMICONDUCTORS & EQUIPMENT-3.7%
679,225 Intel Corporation 80,488,163
93,700 Texas Instruments, Inc. 8,017,206
-------------
88,505,369
-------------
SUPERMARKETS-0.8%
312,375 Safeway, Inc.* 19,035,352
-------------
TELECOMMUNICATION SERVICES-6.5%
498,900 AirTouch Communications, Inc.* 35,983,163
450,000 BellSouth Corporation 22,443,750
974,909 MCI WorldCom, Inc.* 69,949,721
457,875 SBC Communications, Inc. 24,553,547
-------------
152,930,181
-------------
TELECOMMUNICATIONS EQUIPMENT-3.7%
592,325 Lucent Technologies, Inc. 65,155,750
151,075 Motorola, Inc. 9,225,017
256,875 Qwest Communications International,
Inc.* 12,827,695
-------------
87,208,462
-------------
TOTAL COMMON STOCKS
(DOMESTIC)
(COST-$1,858,405,292) 2,258,871,953
-------------
SHARES MARKET VALUE
- --------------------------------------------------------------
COMMON STOCKS (FOREIGN)-1.1%
PHARMACEUTICALS-0.3%
91,475 Glaxo Wellcome PLC Sponsored ADR (UK) $ 6,359,272
-------------
TELECOMMUNICATIONS EQUIPMENT-0.8%
154,675 Nokia Oyj Sponsored ADR (FI) 18,631,822
-------------
TOTAL COMMON STOCKS (FOREIGN)
(COST-$22,820,822)
24,991,094
-------------
CORPORATE SHORT-TERM NOTES-1.4%
$33,300,000 Ciesco LP 5.25% 1/04/99 $ 33,285,431
-------------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-$33,285,431)
33,285,431
-------------
TOTAL INVESTMENTS-98.2%
(COST-$1,914,511,545) 2,317,148,478
OTHER ASSETS & LIABILITIES-1.8%
43,031,053
-------------
NET ASSETS-100% $2,360,179,531
=============
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
FOUNDERS BLUE CHIP FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
1 Year 5 Years 10 Years 20 Years
------ ------- -------- --------
17.78% 17.81% 16.31% 15.10%
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
LIPPER CONSUMER
BLUE CHIP GROWTH FUND PRICE
FUND S&P 500 INDEX INDEX
--------- -------- ------------ --------
12/30/88.... $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/89.... $ 13,556 $ 13,163 $ 12,374 $ 10,464
12/31/90.... $ 13,614 $ 12,755 $ 11,632 $ 11,103
12/31/91.... $ 17,471 $ 16,632 $ 14,860 $ 11,444
12/31/92.... $ 17,430 $ 17,899 $ 16,292 $ 11,774
12/31/93.... $ 19,954 $ 19,701 $ 18,675 $ 12,098
12/30/94.... $ 20,066 $ 19,958 $ 18,597 $ 12,421
12/29/95.... $ 25,898 $ 27,447 $ 24,395 $ 12,736
12/31/96.... $ 32,208 $ 33,738 $ 29,443 $ 13,160
12/31/97.... $ 38,468 $ 44,987 $ 37,379 $ 13,384
12/31/98.... $ 44,652 $ 57,845 $ 46,574 $ 13,638
MANAGEMENT OVERVIEW
A DISCUSSION WITH PORTFOLIO MANAGER
THOMAS ARRINGTON
HOW DID BLUE CHIP EQUITIES PERFORM DURING 1998?
Blue chip stocks faced an unusual year in 1998 due to worldwide economic
problems, coupled with political issues such as the impeachment of President
Clinton and the bombing of Iraq. As the Southeast Asian crisis dominated
investor concerns, large-cap stocks remained popular as sources of relative
stability, liquidity, and earnings potential. This quest for quality drove
market prices high and stretched valuations, particularly during first and
second quarters. Of course during the last half of the year, general instability
in the world's economies caused a period of global volatility. Yet the major
U.S. stock market indexes finished 1998 with an unprecedented four years of
double-digit gains.
HOW WOULD YOU CHARACTERIZE THE BLUE CHIP FUND'S PERFORMANCE?
In a challenging market, the Fund's one-year performance was 17.78%, outpacing
the Lipper Analytical Services category average for the 1-year period ended
December 31,
48
<PAGE>
1998. Our long-term performance was also recognized with a **** overall rating
from Morningstar, with **** for the 3-, 5-, and 10-year periods ended December
31, 1998 among 2802, 1702, and 732 domestic equity funds, respectively.*
TOP 10 HOLDINGS
----------------------------------------------
1. International Business Machines
Corporation 2.40%
2. Service Corporation International 2.39%
3. The Chase Manhattan Corporation 2.26%
4. Philip Morris Companies, Inc. 2.22%
5. Glaxo Wellcome PLC Sponsored ADR 2.15%
6. Merck KGaA 2.07%
7. General Electric Company 2.05%
8. Zeneca Group PLC 1.94%
9. Atlantic Richfield Company 1.93%
10. Merck & Company, Inc. 1.82%
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
----------------------------------------------
Our cautious equity stance helped protect the Blue Chip Fund's performance
during the summer stock-market slide, but we performed less well on a relative
basis when stocks rallied in October.
WHAT STRATEGIES DID YOU USE TO POSITION THE FUND?
Based on our concerns about the valuation of the overall market, as well as the
impact Asia would have on the domestic economy, we underweighted the equity
portion of the Fund and maintained a higher allocation in bonds. Because we were
not fully invested in equities, we sacrificed performance in rising markets, but
protected the portfolio during periods of volatility.
At year-end, the Fund was broadly diversified in an effort to seek portfolio
stability, with 69% invested in domestic equities, and 19% invested in foreign
large-cap growth names. The remainder was in U.S. Treasuries, government agency
issues, corporate bonds, and cash. (See "Portfolio Composition" on page 50.)
We also invested approximately 2% in Canadian government bonds as a way to
generate some additional yield and possibly some currency appreciation in the
Canadian dollar versus the U.S. dollar.
PORTFOLIO AT A GLANCE
-------------------------------
TOTAL ASSETS: $542.3 million
NAV ON DECEMBER 31, 1998: $7.32
EXPENSE RATIO: 1.08%
INCEPTION DATE: 7/5/38
-------------------------------
WHAT KIND OF GROWTH COMPANIES HELPED THE FUND IN 1998?
Using our bottom-up process to seek quality growth stocks, we found earnings
growth in many pharmaceutical stocks. Although pharmaceuticals as a group had
relatively
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary
ratings reflect risk-adjusted performance through 12/31/98. The top 10% of
the funds in an investment category receive 5 stars and the next 22.5%
receive 4 stars. Subject to change every month, a fund's rating is based on
its 3-, 5-, and (when available) 10-year average annual total returns (with
fee adjustments) in excess of 90-day Treasury bill returns, and a risk factor
that reflects fund performance below 90-day Treasury bill returns.
49
<PAGE>
FOUNDERS BLUE CHIP FUND (CONTINUED)
high valuations, we believed they were worth it. We anticipate their earnings
and dividends will increase as the population ages and has greater need for
medications.
Additionally, breakthroughs in research have put important new drugs and
procedures on the market. At the end of the year we owned several companies that
were the
-----------------------------------------------------
PORTFOLIO COMPOSITION
Healthcare ............. 29.1%
Energy ................. 9.7%
Capital Goods .......... 2.8%
Utilities .............. 2.1%
Telecom Services ....... 2.4%
Technology ............. 5.5%
Consumer Cyclicals ..... 4.0%
Basic Materials ........ 5.4%
Transportation ......... 1.1%
U.S. Bonds & Treasuries. 8.1%
Cash & Equivalents ..... 2.2%
Consumer Staples ....... 15.2%
Financial .............. 10.5%
Foreign Bonds .......... 1.9%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
-----------------------------------------------------
subject of recent mergers, including Zeneca Group PLC, Rhone-Poulenc, and
Synthelabo.
We also liked utility stocks. These stocks provided an important income
component for the Blue Chip Fund since they had a larger yield than the market.
Utilities also tended to be defensive stocks. We felt they would outperform in a
down market due to their strong yields and their low foreign exposure. In this
sector, we held MCN Energy Group, Inc., Northern States Power Company and
Cinergy Corporation at year end.
WHAT IS YOUR OUTLOOK FOR 1999?
Overall, our long-term outlook is positive. Although we expect continued slow
economic growth in the U.S. for the remainder of the year, the U.S. economy is
still healthy. Corporate profits are slowing, but we expect they will continue
to grow at a more normal average in 1999. Consumer confidence is high, wages are
rising, and there are still plenty of jobs and a strong housing market. We also
anticipate robust corporate merger activity, benign inflation, and the first
federal budget surplus in 30 years.
/s/ THOMAS ARRINGTON
Thomas Arrington, CFA
Portfolio Manager
50
<PAGE>
FOUNDERS BLUE CHIP FUND STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- -----------------------------------------------------------
COMMON STOCKS (DOMESTIC)-68.7%
BANKING-6.4%
180,200 The Chase Manhattan Corporation $12,264,863
163,600 Citigroup, Inc. 8,098,200
43,200 Comerica, Inc. 2,945,700
58,200 First Union Corporation 3,539,288
48,500 PNC Bank Corporation 2,625,063
63,500 Summit Bancorp. 2,774,156
56,000 Union Planters Corporation 2,537,500
----------
34,784,770
----------
CHEMICALS-0.7%
72,900 E.I. du Pont de Nemours and Company 3,868,256
----------
COMPUTER EQUIPMENT-3.3%
70,400 International Business Machines
Corporation 13,006,400
56,600 Sun Microsystems, Inc.* 4,842,838
----------
17,849,238
----------
COMPUTER SOFTWARE/SERVICES-1.9%
127,800 Computer Associates International,
Inc. 5,447,475
67,100 Oracle Corporation* 2,893,688
113,300 Platinum Technology, Inc.* 2,173,944
----------
10,515,107
----------
CONSUMER PRODUCTS-5.8%
19,100 Colgate-Palmolive Company 1,773,913
199,675 The Dial Corporation 5,765,616
49,300 Kimberly-Clark Corporation 2,686,850
225,125 Philip Morris Companies, Inc. 12,044,188
43,900 The Procter & Gamble Company 4,008,619
180,000 RJR Nabisco Holdings Corporation 5,343,750
----------
31,622,936
----------
SHARES MARKET VALUE
- -----------------------------------------------------------
ELECTRONICS-2.1%
109,000 General Electric Company $11,124,813
----------
FINANCIAL SERVICES-0.5%
28,400 American Express Company 2,903,900
----------
FOOD & BEVERAGE-2.4%
144,000 The Coca-Cola Company 9,630,000
52,400 Hershey Foods Corporation 3,258,625
----------
12,888,625
----------
FUNERAL HOMES-3.4%
341,175 Service Corporation International 12,985,973
253,200 Stewart Enterprises, Inc. Class A 5,617,875
----------
18,603,848
----------
HEALTHCARE SERVICES-2.4%
328,500 Humana, Inc.* 5,851,406
265,200 Tenet Healthcare Corporation* 6,961,500
----------
12,812,906
----------
INSURANCE-3.6%
172,700 The Allstate Corporation 6,670,538
30,400 American International Group, Inc. 2,937,400
84,900 The Chubb Corporation 5,507,888
56,700 Travelers Property Casualty
Corporation Class A 1,757,700
75,450 W.R. Berkley Corporation 2,527,576
----------
19,401,102
----------
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
FOUNDERS BLUE CHIP FUND
SHARES MARKET VALUE
- -----------------------------------------------------------
LEISURE & ENTERTAINMENT-0.3%
9,400 America Online, Inc.* $1,504,000
----------
MANUFACTURING-0.7%
55,600 Minnesota Mining and Manufacturing
Company 3,954,550
----------
MEDICAL SUPPLIES & EQUIPMENT-4.7%
118,400 Baxter International, Inc. 7,614,600
135,200 Becton, Dickinson and Company 5,771,350
146,200 Biomet, Inc. 5,875,413
71,500 Johnson & Johnson 5,997,063
----------
25,258,426
----------
METALS & MINING-0.7%
143,300 Homestake Mining Company 1,316,569
212,000 Placer Dome, Inc. 2,438,000
----------
3,754,569
----------
OIL & GAS-8.6%
160,600 Atlantic Richfield Company 10,479,150
159,700 Conoco, Inc.* 3,333,738
71,400 Mobil Corporation 6,220,725
146,100 Phillips Petroleum Company 6,227,513
107,000 Questar Corporation 2,073,125
188,075 Sonat, Inc. 5,089,780
292,250 USX-Marathon Group 8,804,031
150,000 Unocal Corporation 4,378,125
----------
46,606,187
----------
OIL SERVICES-1.1%
387,100 BJ Services Company* 6,048,438
----------
SHARES MARKET VALUE
- -----------------------------------------------------------
PHARMACEUTICALS-10.1%
166,200 Abbott Laboratories $8,143,800
106,300 American Home Products Corporation 5,986,019
66,100 Bristol-Myers Squibb Company 8,845,006
65,325 Eli Lilly and Company 5,805,759
66,800 Merck & Company, Inc. 9,865,525
53,300 Pfizer, Inc. 6,685,819
98,300 Pharmacia & Upjohn, Inc. 5,566,238
53,600 Warner-Lambert Company 4,030,050
----------
54,928,216
----------
PUBLISHING & BROADCASTING-3.8%
107,775 MediaOne Group, Inc.* 5,065,425
40,400 The New York Times Company 1,401,375
86,400 Tele-Communications, Inc. Class A* 4,779,000
44,700 Time Warner, Inc. 2,774,194
48,925 Tribune Company 3,229,050
6,000 The Washington Post Company 3,467,625
----------
20,716,669
----------
SUPERMARKETS-1.7%
178,900 Hannaford Brothers Company 9,481,700
----------
TELECOMMUNICATION SERVICES-2.4%
93,500 Bell Atlantic Corporation 4,955,500
120,600 GTE Corporation 7,839,000
----------
12,794,500
----------
UTILITIES-2.1%
68,250 Cinergy Corporation 2,346,094
330,300 MCN Energy Group, Inc. 6,296,344
90,300 Northern States Power Company 2,505,824
----------
11,148,262
----------
TOTAL COMMON STOCKS
(DOMESTIC)
(COST-$317,635,786) 372,571,018
-----------
52
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
SHARES MARKET VALUE
- -----------------------------------------------------------
COMMON STOCKS (FOREIGN)-19.1%
CHEMICALS-3.2%
133,200 Bayer AG (GE) $ 5,562,330
114,100 Rhone-Poulenc SA (FR) 5,874,536
122,300 Rhone-Poulenc SA Sponsored ADR (FR) 6,145,575
-----------
17,582,441
-----------
FOOD & BEVERAGE-1.4%
3,600 Nestle SA Registered (SZ) 7,837,468
-----------
LEISURE & ENTERTAINMENT-0.6%
179,500 Granada Group PLC (UK) 3,173,357
-----------
METALS & MINING-0.8%
214,600 Barrick Gold Corporation (CA) 4,184,700
-----------
SHARES MARKET VALUE
- -----------------------------------------------------------
PHARMACEUTICALS-12.0%
167,425 Glaxo Wellcome PLC Sponsored ADR (UK) $11,636,038
249,700 Merck KGaA (GE) 11,244,371
3,300 Novartis AG Registered (SZ) 6,491,180
231,700 Sankyo Company, Limited (JA) 5,073,726
44,650 Schering AG (GE) 5,609,734
91,525 Smithkline Beecham PLC Sponsored ADR
Class A (UK) 6,360,988
37,300 Synthelabo (FR) 7,900,090
241,100 Zeneca Group PLC (UK) 10,498,481
-----------
64,814,608
-----------
TRANSPORTATION-1.1%
115,000 Canadian National Railway Company
(CA) 5,965,625
-----------
TOTAL COMMON STOCKS
(FOREIGN)
(COST-$90,768,980) 103,558,199
-----------
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
53
<PAGE>
FOUNDERS BLUE CHIP FUND STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------
CORPORATE BONDS (DOMESTIC)-1.2%
UTILITIES-1.2%
$1,332,000 Commonwealth Edison
Company 7.625%
Due 01/15/07 $ 1,474,862
1,331,000 Sonat, Inc. 6.625%
Due 02/01/08 1,366,468
3,660,000 Sonat, Inc. 7.00%
Due 02/01/18 3,689,042
-----------
TOTAL CORPORATE BONDS
(DOMESTIC)
(COST-$6,570,648) 6,530,372
-----------
FOREIGN GOVERNMENT BONDS-1.9%
4,608,583 Province of Ontario 6.125%
Due 09/12/07 (CA) 4,851,916
4,646,518 Province of Ontario 6.50%
Due 03/08/29 (CA) 5,099,757
-----------
TOTAL FOREIGN GOVERNMENT BONDS
(COST-$9,648,612) 9,951,673
-----------
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------
U.S. GOVERNMENT SECURITIES-6.9%
U.S. AGENCIES-3.1%
$15,900,000 Federal National
Mortgage Association 6.00%
Due 05/15/08 $16,777,235
-----------
U.S. TREASURY BONDS-1.6%
7,500,000 U.S. Treasury Bond 6.625%
Due 02/15/27 8,871,098
-----------
U.S. TREASURY NOTES-2.2%
4,000,000 U.S. Treasury Note 4.625%
Due 11/30/00 4,002,500
4,000,000 U.S. Treasury Note 4.25%
Due 11/15/03 3,947,500
4,000,000 U.S. Treasury Note 4.75%
Due 11/15/08 4,031,252
-----------
11,981,252
-----------
TOTAL U.S. GOVERNMENT
SECURITIES
(COST-$35,245,714) 37,629,585
-----------
PRINCIPAL AMOUNT AMORTIZED COST
- ------------------------------------------------------------
CORPORATE SHORT-TERM NOTES-1.4%
$ 7,600,000 Federal Home Loan Mortgage
Corporation Discount Note 4.45%
01/04/99 $ 7,597,182
-----------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED
COST-$7,597,182) 7,597,182
-----------
TOTAL INVESTMENTS-99.2%
(COST-$467,466,922) 537,838,029
OTHER ASSETS &
LIABILITIES-0.8% 4,468,689
-----------
NET ASSETS-100.0% $542,306,718
===========
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
54
<PAGE>
FOUNDERS BALANCED FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
1 Year 5 Years 10 Years 20 Years
------ ------- -------- --------
13.96% 14.96% 14.26% 14.03%
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
LIPPER CONSUMER
BALANCED GROWTH FUND PRICE
FUND S&P 500 INDEX INDEX
--------- -------- ------------ ---------
12/30/88.... $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/89.... $ 12,529 $ 13,163 $ 11,970 $ 10,464
12/31/90.... $ 11,902 $ 12,755 $ 12,048 $ 11,103
12/31/91.... $ 14,623 $ 16,632 $ 15,161 $ 11,444
12/31/92.... $ 15,501 $ 17,899 $ 16,294 $ 11,774
12/31/93.... $ 18,888 $ 19,701 $ 18,239 $ 12,098
12/30/94.... $ 18,524 $ 19,958 $ 17,867 $ 12,421
12/29/95.... $ 23,972 $ 27,447 $ 22,312 $ 12,736
12/31/96.... $ 28,470 $ 33,738 $ 25,217 $ 13,160
12/31/97.... $ 33,291 $ 44,987 $ 30,273 $ 13,384
12/31/98.... $ 37,939 $ 57,845 $ 34,825 $ 13,638
MANAGEMENT OVERVIEW
A DISCUSSION WITH PORTFOLIO MANAGER
BRIAN KELLY
HOW DID THE BALANCED FUND PERFORM DURING 1998?
In a year characterized by an ongoing currency crisis in Southeast Asia, coupled
with a summer of domestic market volatility, investors continued to seek
large-cap stocks for their relative stability, liquidity, and earnings
potential. This "flight to quality" was one of the main factors driving stock
prices to all-time highs in 1998.
Against this backdrop, the Fund returned 13.96% for the one-year period ended
December 31, 1998. Our long-term performance was recognized with a
**** overall rating from Morningstar, with **** for the 3-, 5-, and 10-year
periods ended December 31, 1998, among 2802, 1702, and 732 domestic equity
funds, respectively.*
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary
ratings reflect risk-adjusted performance through 12/31/98. The top 10% of the
funds in an investment category receive 5 stars and the next 22.5% receive 4
stars. Subject to change every month, a fund's rating is based on its 3-, 5-,
and (when available) 10- year average annual total returns (with fee
adjustments) in excess of 90-day Treasury bill returns, and a risk factor that
reflects fund performance below 90-day Treasury bill returns.
55
<PAGE>
FOUNDERS BALANCED FUND (CONTINUED)
HOW WAS THE FUND POSITIONED THROUGHOUT THE YEAR?
Our objective is to provide current income and capital appreciation through a
portfolio of equity and fixed-income holdings. Since we have the flexibility to
adjust the Fund's investment composition in accordance with a changing market,
we evaluated market conditions and decided to keep it conservatively positioned.
We focused the
TOP 10 EQUITY HOLDINGS
------------------------------------------------
1. Rhone-Poulenc SA 1.66%
2. International Business Machines
Corporation 1.43%
3. Atlantic Richfield Company 1.41%
4. Service Corporation International 1.38%
5. Philip Morris Companies, Inc. 1.33%
6. The Chase Manhattan Corporation 1.33%
7. General Electric Company 1.30%
8. Glaxo Wellcome PLC Sponsored ADR 1.28%
9. Merck KGaA 1.24%
10. Zeneca Group PLC 1.18%
PORTFOLIO HOLDINGS ARE SUBJECT TO CHANGE.
------------------------------------------------
portfolio by increasing our positions in the most liquid names and trimming our
holdings in smaller, more illiquid positions, as well as several stocks that
were underperformers. This conservative positioning negatively impacted our
performance during the first and second quarters because we missed out on some
of the performance strength in equities.
During last summer's decline, however, we were able to limit the Fund's losses
by maintaining this conservative equity position. We were also able to boost the
Fund's performance by purchasing several stocks at bargain prices.
As we moved into the fall, we became increasingly concerned about the problems
in the global economy, and the subsequent volatility that ensued in the equity
markets. Accordingly, we increased the Fund's holdings in U.S. government
securities while at the same time reducing the Fund's equity holdings. This
strategy was successful and the fixed-income holdings were especially
beneficial. The Balanced Fund was down very little in the third quarter compared
to more equity-weighted funds.
PORTFOLIO AT A GLANCE
--------------------------------
TOTAL ASSETS: $1.2 billion
NAV ON DECEMBER 31, 1998: $12.19
EXPENSE RATIO: 0.99%
INCEPTION DATE: 2/19/63
--------------------------------
We continued to believe valuations on many large-cap names were somewhat high
at the end of the year and we maintained our conservative positioning. At period
end, 41% of the Fund was in U.S. equities and 13% in foreign large-cap stocks,
with 42% of
56
<PAGE>
the portfolio in U.S. government securities and corporate bonds, and 1.8% in
foreign bonds (see "Portfolio Composition.") We also further diversified the
portfolio to seek greater stability, with exposure to most major industries
including pharmaceuticals, oil and gas, consumer products,
and banking.
------------------------------------------------
PORTFOLIO COMPOSITION
Capital Goods ...... 1.8%
Transportation ..... 0.7%
Utilities .......... 0.3%
Technology ......... 3.6%
Telecom Services ... 1.4%
Financial .......... 6.5%
Energy ............. 5.7%
Basic Materials .... 3.8%
Consumer Cyclicals.. 1.8%
Cash & Equivalents.. 2.4%
Foreign Bonds ...... 1.8%
Consumer Staples ... 8.7%
U.S. Bonds &
Treasuries ........ 42.1%
Healthcare ......... 19.4%
PORTFOLIO COMPOSITION IS SUBJECT TO CHANGE.
------------------------------------------------
WHAT WAS YOUR INVESTMENT STRATEGY IN SELECTING GROWTH STOCKS FOR THE FUND?
We rely on a bottom-up process to seek growth stocks. Throughout the year we
continued to find good earnings growth in pharmaceutical stocks. Although this
group has high valuations, we believe the earnings of large drug companies will
increase as the Baby Boom population ages and has increased need for
medications. Rhone-Poulenc, a French chemical and pharmaceutical company, was
our top holding at year end.
Because we maintained a conservative stance in the Fund throughout the year,
we stuck with very liquid, well-known growth companies with strong earnings
potential. For example, General Electric Company, a household name with very
consistent earnings per share growth and a broad representation of industry
exposure, was one of our top 10 holdings at year end.
WHAT IS YOUR OUTLOOK FOR 1999?
Corporate earnings estimates are under pressure and earnings growth rates are
actually declining. Given current market valuations, those companies that fall
short of earnings expectations may come under pressure. We will work even harder
to seek the best growth companies the market has to offer. When such
opportunities are not present, we will lean toward the stability of U.S.
Treasuries when needed.
/s/ BRIAN KELLY
Brian Kelly
Portfolio Manager
57
<PAGE>
FOUNDERS BALANCED FUND
SHARES MARKET VALUE
- -----------------------------------------------------------
COMMON STOCKS (DOMESTIC)-40.7%
BANKING-3.9%
242,600 The Chase Manhattan Corporation $16,511,963
254,400 Citigroup, Inc. 12,592,800
60,000 Comerica, Inc. 4,091,250
80,800 First Union Corporation 4,913,650
67,300 PNC Bank Corporation 3,642,613
88,100 Summit Bancorp. 3,848,869
72,000 Union Planters Corporation 3,262,500
----------
48,863,645
----------
CHEMICALS-0.5%
125,100 E.I. du Pont de Nemours and Company 6,638,119
----------
COMPUTER EQUIPMENT-1.9%
96,000 International Business Machines
Corporation 17,736,000
73,500 Sun Microsystems, Inc.* 6,288,844
----------
24,024,844
----------
COMPUTER SOFTWARE/SERVICES-1.5%
172,000 Computer Associates International,
Inc. 7,331,500
134,800 Oracle Corporation* 5,813,250
256,800 Platinum Technology, Inc.* 4,927,350
----------
18,072,100
----------
CONSUMER PRODUCTS-3.7%
38,800 Colgate-Palmolive Company 3,603,550
322,250 The Dial Corporation 9,304,969
76,700 Kimberly-Clark Corporation 4,180,150
309,900 Philip Morris Companies, Inc. 16,579,650
60,900 The Procter & Gamble Company 5,560,931
242,000 RJR Nabisco Holdings Corporation 7,184,375
----------
46,413,625
----------
ELECTRONICS-1.3%
158,600 General Electric Company 16,187,113
----------
FINANCIAL SERVICES-0.3%
39,100 American Express Company 3,997,975
----------
SHARES MARKET VALUE
- -----------------------------------------------------------
FOOD & BEVERAGE-0.9%
100,300 The Coca-Cola Company $6,707,563
80,200 Hershey Foods Corporation 4,987,438
----------
11,695,001
----------
FUNERAL HOMES-1.5%
451,500 Service Corporation International 17,185,219
66,125 Stewart Enterprises, Inc. Class A 1,467,148
----------
18,652,367
----------
HEALTHCARE SERVICES-1.6%
535,500 Humana, Inc.* 9,538,594
372,300 Tenet Healthcare Corporation* 9,772,875
----------
19,311,469
----------
INSURANCE-2.3%
288,500 The Allstate Corporation 11,143,313
40,500 American International Group, Inc. 3,913,313
118,075 The Chubb Corporation 7,660,116
72,900 Travelers Property Casualty
Corporation Class A 2,259,900
93,150 W.R. Berkley Corporation 3,120,526
----------
28,097,168
----------
LEISURE & ENTERTAINMENT-0.2%
12,900 America Online, Inc.* 2,064,000
----------
MANUFACTURING-0.5%
86,400 Minnesota Mining and Manufacturing
Company 6,145,200
----------
MEDICAL SUPPLIES & EQUIPMENT-2.9%
163,400 Baxter International, Inc. 10,508,663
236,500 Becton, Dickinson and Company 10,095,594
179,300 Biomet, Inc. 7,205,619
105,700 Johnson & Johnson 8,865,588
----------
36,675,464
----------
OIL & GAS-5.7%
268,900 Atlantic Richfield Company 17,545,725
365,600 Conoco, Inc.* 7,631,900
153,900 Mobil Corporation 13,408,538
229,200 Phillips Petroleum Company 9,769,650
329,400 Sonat, Inc. 8,914,388
433,350 USX-Marathon Group 13,054,669
----------
70,324,870
----------
58
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
SHARES MARKET VALUE
- -----------------------------------------------------------
PHARMACEUTICALS-7.1%
258,600 Abbott Laboratories $12,671,400
148,800 American Home Products Corporation 8,379,300
102,400 Bristol-Myers Squibb Company 13,702,400
119,475 Eli Lilly and Company 10,618,341
92,900 Merck & Company, Inc. 13,720,169
109,000 Pfizer, Inc. 13,672,688
167,000 Pharmacia & Upjohn, Inc. 9,456,375
83,000 Warner-Lambert Company 6,240,563
----------
88,461,236
----------
PUBLISHING & BROADCASTING-2.5%
181,325 MediaOne Group, Inc.* 8,522,275
115,000 Tele-Communications, Inc. Class A* 6,360,938
61,500 Time Warner, Inc. 3,816,844
111,300 Tribune Company 7,345,800
9,100 The Washington Post Company 5,259,231
----------
31,305,088
----------
SUPERMARKETS-0.7%
153,200 Hannaford Brothers Company 8,119,600
----------
TELECOMMUNICATION SERVICES-1.4%
128,200 Bell Atlantic Corporation 6,794,600
162,250 GTE Corporation 10,546,250
----------
17,340,850
----------
UTILITIES-0.3%
126,325 Cinergy Corporation 4,342,422
----------
TOTAL COMMON STOCKS
(DOMESTIC)
(COST-$452,059,243) 506,732,156
-----------
SHARES MARKET VALUE
- -----------------------------------------------------------
COMMON STOCKS (FOREIGN)-12.8%
CHEMICALS-2.3%
179,000 Bayer AG (GE) $7,474,902
400,125 Rhone-Poulenc SA (FR) 20,600,779
22,075 Rhone-Poulenc SA Sponsored ADR (FR) 1,109,269
----------
29,184,950
----------
FOOD & BEVERAGE-0.9%
5,400 Nestle SA Registered (SZ) 11,756,442
----------
LEISURE & ENTERTAINMENT-0.3%
240,000 Granada Group PLC (UK) 4,242,928
----------
METALS & MINING-0.8%
497,900 Barrick Gold Corporation (CA) 9,709,050
----------
PHARMACEUTICALS-7.8%
228,825 Glaxo Wellcome PLC Sponsored ADR (UK) 15,903,338
342,600 Merck KGaA (GE) 15,427,799
4,600 Novartis AG Registered (SZ) 9,050,316
315,300 Sankyo Company, Limited (JA) 6,904,384
95,275 Schering AG (GE) 11,970,155
283,000 Smithkline Beecham PLC (UK) 3,954,845
93,100 Smithkline Beecham PLC Sponsored ADR
Class A (UK) 6,470,451
56,800 Synthelabo (FR) 12,029,073
337,500 Zeneca Group PLC (UK) 14,696,131
----------
96,406,492
----------
TRANSPORTATION-0.7%
157,200 Canadian National Railway Company
Sponsored ADR (CA) 8,154,750
----------
TOTAL COMMON STOCKS
(FOREIGN)
(COST-$137,345,127) 159,454,612
----------
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
59
<PAGE>
FOUNDERS BALANCED FUND
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------
CORPORATE BONDS (DOMESTIC)-2.0%
CONSUMER PRODUCTS-0.2%
$2,000,000 Philip Morris Companies, Inc. 7.25%
Due 09/15/01 $ 2,082,444
-----------
MISCELLANEOUS-0.7%
3,000,000 Lockheed Martin Corporation 7.00%
Due 09/15/23 3,115,278
3,000,000 PacifiCorp 6.375%
Due 05/15/08 3,146,034
2,500,000 US West Capital Funding, Inc. 6.25%
Due 07/15/05 2,607,658
-----------
8,868,970
-----------
UTILITIES-1.1%
2,706,000 Commonwealth Edison Company 7.625%
Due 01/15/07 2,996,229
2,705,000 Sonat, Inc. 6.625%
Due 02/01/08 2,777,083
8,190,000 Sonat, Inc. 7.00%
Due 02/01/18 8,254,988
-----------
14,028,300
-----------
TOTAL CORPORATE BONDS
(DOMESTIC)
(COST-$25,464,518) 24,979,714
-----------
FOREIGN GOVERNMENT BONDS-1.8%
10,493,339 Province of Ontario 6.125%
Due 09/12/07 (CA) 11,047,416
10,404,074 Province of Ontario 6.50% Due
03/08/29 (CA) 11,418,910
-----------
TOTAL FOREIGN GOVERNMENT BONDS
(COST-$21,780,777) 22,466,326
-----------
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------
U.S. GOVERNMENT SECURITIES-40.1%
U.S. AGENCIES-3.9%
$10,500,000 Federal National Mortgage Association
6.35%
Callable 01/08/99
Due 01/08/03 $10,500,714
36,500,000 Federal National Mortgage Association
6.00% Due 05/15/08 38,513,778
-----------
49,014,492
-----------
U.S. TREASURY BILLS-1.8%
23,000,000 U.S. Treasury Bill 4.33%
Due 12/09/99 22,051,250
-----------
U.S. TREASURY BONDS-6.1%
19,200,000 U.S. Treasury Bond 6.625%
Due 02/15/27 22,710,010
46,500,000 U.S. Treasury Bond 6.375%
Due 08/15/27 53,475,000
-----------
76,185,010
-----------
60
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998 (CONTINUED)
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------
U.S. TREASURY NOTES-28.3%
$20,500,000 U.S. Treasury Note 6.375%
Due 05/15/00 $20,961,250
24,250,000 U.S. Treasury Note 5.50%
Due 05/31/00 24,530,403
900,000 U.S. Treasury Note 6.00%
Due 08/15/00 918,563
9,500,000 U.S. Treasury Note 5.75%
Due 10/31/00 9,681,099
14,000,000 U.S. Treasury Note 5.75%
Due 11/15/00 14,271,250
24,600,000 U.S. Treasury Note 4.625%
Due 11/30/00 24,615,375
12,700,000 U.S. Treasury Note 6.625%
Due 03/31/02 13,422,313
15,200,000 U.S. Treasury Note 6.625%
Due 04/30/02 16,083,500
16,500,000 U.S. Treasury Note 6.25%
Due 02/15/03 17,438,438
48,100,000 U.S. Treasury Note 4.25%
Due 11/15/03 47,468,688
19,600,000 U.S. Treasury Note 5.875%
Due 11/15/05 20,910,750
8,700,000 U.S. Treasury Note 5.625%
Due 02/15/06 9,175,786
8,900,000 U.S. Treasury Note 6.875%
Due 05/15/06 10,059,786
37,100,000 U.S. Treasury Note 6.25%
Due 02/15/07 40,694,062
53,500,000 U.S. Treasury Note 5.50%
Due 02/15/08 56,710,000
24,600,000 U.S. Treasury Note 4.75%
Due 11/15/08 24,792,200
-----------
351,733,463
-----------
TOTAL U.S. GOVERNMENT SECURITIES
(COST-$472,402,265) 498,984,215
-----------
PRINCIPAL AMOUNT MARKET VALUE
- -------------------------------------------------------------
CORPORATE SHORT-TERM NOTES-4.3%
$53,400,000 Federal Home Loan Mortgage
Corporation Discount Note 4.45%
01/04/99 $ 53,380,198
-------------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-
$53,380,198) 53,380,198
-------------
TOTAL INVESTMENTS-101.7%
(COST-$1,162,432,128) 1,265,997,221
OTHER ASSETS &
LIABILITIES-(1.7%) (21,776,079)
-------------
NET ASSETS-100.0% $1,244,221,142
=============
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
61
<PAGE>
FOUNDERS GOVERNMENT SECURITIES FUND
AVERAGE ANNUAL TOTAL RETURN [BAR GRAPH]
AS OF 12/31/98*
Since Inception
1 Year 5 Years 10 Years (3/1/88)
------ ------- -------- ---------------
9.76% 4.49% 6.90% 6.67%
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
GROWTH OF $10,000 INVESTMENT
LEHMAN LIPPER CONSUMER
GOVERNMENT BROS. US GOVT. PRICE
SEC. US TR. COR FD.INDEX INDEX
--------- ---------- ------------ --------
12/30/88.... $ 10,000 $ 10,000 $ 10,000 $ 10,000
12/31/89.... $ 11,331 $ 11,435 $ 10,874 $ 10,464
12/31/90.... $ 11,834 $ 12,419 $ 11,713 $ 11,103
12/31/91.... $ 13,593 $ 14,327 $ 12,377 $ 11,444
12/31/92.... $ 14,315 $ 15,363 $ 12,792 $ 11,774
MANAGEMENT OVERVIEW
A DISCUSSION WITH FIXED-INCOME MANAGER
MARGARET DANUSER
HOW DID THE GOVERNMENT SECURITIES FUND PERFORM IN 1998?
In a year that was marked by stock market volatility around the world, U.S.
Treasuries presented a safe harbor for many investors. In this environment, the
Founders Government Securities Fund returned 9.76% for the one-year period ended
December 31, 1998.
WHAT FACTORS INFLUENCED THE BOND MARKETS?
Early in the year, all eyes--including the Federal Reserve's--were on the
Southeast Asian economic crisis to determine the impact it would have on
domestic earnings. This period of ongoing volatility in the financial markets
brought an incredible January bond rally as investors turned
to Treasuries.
The Government Securities Fund performed very well in January but its
performance dropped in February on bond market weakness. This weakness was
spurred by Federal Reserve Chairman Alan Greenspan's hint to Congress that the
Fed had no plans to ease interest rates due to
62
<PAGE>
continued strong economic data and low inflation. Greenspan did, however, warn
of impending storm clouds brewing in Asia and the possibility that global
economic problems could eventually slow down our domestic economy.
As investors' uncertainty grew about the Asian crisis, they flocked to bonds
and other dollar-denominated assets in a "flight
to quality."
While bonds were strong during the first half of 1998 and popular with
investors, Treasuries became less attractive in the mid-summer when it seemed
the IMF's financial aid package would bail out Russia, and Japan indicated it
would make necessary reforms.
By third quarter, the Federal Reserve intervened, cutting rates three times in
the third and fourth quarters of 1998 in hopes of cushioning the U.S. economy
from global financial turmoil.
WHAT STRATEGIES DID YOU USE IN THIS ENVIRONMENT?
We have the flexibility to change the duration of bonds in the portfolio to best
take advantage of the yield curve. For the first half of the year, we
consistently lengthened the Fund's duration to around six years on the
expectation that the Asian currency crisis would slow the domestic economy and
limit inflation.
We also concentrated the portfolio in two sectors that we believed showed
potential for price appreciation: issues with a four- to seven-year maturity,
and those in the 10- to 30-year sector. Because interest rates were low in 1998,
many homeowners prepaid or refinanced their mortgages. As a result, we kept our
mortgage holdings low, around 7% during the first half and dropping to 5% by the
end of the year. We also held low-couponed mortgages that were less susceptible
to prepayments.
At period end, the Fund's modified duration was 5.59 years with an average
maturity of 9.08 years. The majority of the portfolio's assets were concentrated
in the highest quality U.S. Treasuries and government agency issues, with 5% in
domestic mortgages. We can adjust our average weighted maturity in response to
changing market conditions, and 79% of the portfolio was in issues with a
maturity 10 years and under.
WHAT DO YOU ANTICIPATE WILL AFFECT THE BOND MARKETS THIS YEAR?
As the world stock markets show volatility, we believe investors may continue to
find bonds an attractive investment alternative. Right now, the U.S. dollar is
strong, which may help keep the damper on inflation. We believe U.S. Treasuries
may also continue to be popular with overseas investors who may benefit from
currency conversions.
/s/ MARGARET DANUSER
Margaret Danuser
Fixed-Income Manager
63
<PAGE>
FOUNDERS GOVERNMENT SECURITIES FUND
PRINCIPAL AMOUNT MARKET VALUE
- ----------------------------------------------------------
U.S. GOVERNMENT SECURITIES-92.1%
FNMA POOLS-5.0%
$ 749,297 Federal National Mortgage Association
7.00%
Due 03/01/12 $ 765,789
----------
U.S. AGENCIES-26.8%
1,025,000 Federal Farm Credit Bank 6.55%
Due 08/19/03 1,079,036
815,000 Federal Farm Credit Bank 8.06%
Due 01/04/05 935,766
1,000,000 Federal National Mortgage Association
6.70%
Due 08/10/01 1,009,689
1,000,000 Federal National Mortgage Association
6.00%
Due 05/15/08 1,055,172
----------
4,079,663
----------
PRINCIPAL AMOUNT MARKET VALUE
- ----------------------------------------------------------
U.S. TREASURY BONDS-20.9%
$ 400,000 U.S. Treasury Bond 7.25%
Due 05/15/16 $ 485,250
400,000 U.S. Treasury Bond 8.125%
Due 08/15/19 534,875
900,000 U.S. Treasury Bond 6.25%
Due 08/15/23 1,006,875
1,000,000 U.S. Treasury Bond 6.375%
Due 08/15/27 1,150,000
----------
3,177,000
----------
SEE NOTES TO FINANCIAL STATEMENTS.
64
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------
U.S. TREASURY NOTES-39.4%
$ 700,000 U.S. Treasury Note 6.00%
Due 10/15/99 $ 707,219
1,500,000 U.S. Treasury Note 5.50%
Due 05/31/00 1,517,345
1,300,000 U.S. Treasury Note 6.50%
Due 10/15/06 1,443,000
750,000 U.S. Treasury Note 5.50%
Due 02/15/08 795,000
1,000,000 U.S. Treasury Note 12.00%;
Due 8/15/13 1,528,750
---------
5,991,314
---------
TOTAL U.S. GOVERNMENT SECURITIES
(COST-$13,276,012) 14,013,766
---------
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------
CORPORATE SHORT-TERM NOTES-5.6%
$460,000 Ciesco LP 5.25% 01/04/99 $ 459,799
400,000 Transamerica Finance Corporation
5.00% 01/04/99 399,833
-----------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-$859,632) 859,632
-----------
TOTAL INVESTMENTS-97.7%
(COST-$14,135,644) 14,873,398
OTHER ASSETS &
LIABILITIES-2.3% 346,731
-----------
NET ASSETS-100.0% $15,220,129
===========
65
<PAGE>
FOUNDERS MONEY MARKET FUND
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------
CORPORATE SHORT-TERM NOTES-84.1%
AGRICULTURE-4.9%
$4,500,000 Pioneer Hi-Bred International, Inc.
5.65%
01/04/99 $4,497,881
----------
CAPTIVE FINANCE AUTOMOTIVE-4.5%
3,300,000 Ford Motor Credit Company 5.52%
01/07/99 3,296,964
800,000 Ford Motor Credit Company 5.20%
01/08/99 799,191
---------
4,096,155
---------
CAPTIVE FINANCE DIVERSIFIED-3.3%
3.000,000 General Electric Capital Corporation
5.70%
01/11/99 2,995,333
---------
CAPTIVE FINANCE INSURANCE-9.2%
4,200,000 A.I. Credit Corporation 4.90%
01/04/99 4,198,285
4,200,000 Prudential Funding Corporation 4.80%
01/15/99 4,192,160
---------
8,390,445
---------
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------
CAPTIVE FINANCE UTILITIES-3.3%
$3,000,000 Progress Capital Holdings, Inc. 5.68%
01/12/99 $2,994,793
----------
CHEMICALS-4.8%
4,500,000 Akzo Nobel, Inc.
5.00%
04/22/99 4,430,625
----------
DIVERSIFIED-4.4%
4,000,000 E.I. du Pont de Nemours and Company
5.20%
01/20/99 3,989,022
----------
FINANCIAL SERVICES-11.4%
3,500,000 American Express Credit Corporation
5.85%
01/08/99 3,496,019
3,500,000 Ciesco LP 5.30%
01/22/99 3,489,179
3,400,000 Household Finance Corporation 5.70%
01/13/99 3,393,540
----------
10,378,738
----------
FOOD & BEVERAGE-8.4%
4,000,000 Allied Domecq North America 5.37%
01/21/99 3,988,067
3,700,000 PepsiCo, Inc. 5.20%
01/06/99 3,697,328
----------
7,685,395
----------
66
<PAGE>
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------
OFFICE EQUIPMENT-3.9%
$3,600,000 Pitney Bowes, Inc. 5.65%
01/06/99 $3,597,175
----------
OIL & GAS-6.0%
1,500,000 Consolidated Natural Gas Company
5.10%
02/01/99 1,493,413
4,000,000 Exxon Corporation 5.75% 01/05/99 3,997,444
---------
5,490,857
---------
PHOTOGRAPHY & IMAGING-4.9%
4,500,000 Eastman Kodak Company
5.43%
01/14/99 4,491,176
---------
PUBLISHING & BROADCASTING-7.9%
7,300,000 The McGraw-Hill Companies
5.32%
02/04/99 7,263,322
---------
SEMICONDUCTORS-2.8%
2,550,000 Motorola, Inc. 5.08% 01/28/99 2,540,284
---------
UTILITIES-4.4%
4,000,000 Southern California Edison Company
5.40%
01/12/99 3,993,400
---------
TOTAL CORPORATE
SHORT-TERM NOTES
(AMORTIZED COST-
$76,834,601) 76,834,601
----------
PRINCIPAL AMOUNT AMORTIZED COST
- ----------------------------------------------------------
U.S. AGENCIES-15.6%
$7,100,000 Federal Home Loan Mortgage
Corporation Discount Note 5.085%
02/25/99 $ 7,044,842
7,300,000 Federal National Mortgage Association
Discount Note
4.99%
03/03/99 7,238,277
-----------
TOTAL U.S. AGENCIES
(AMORTIZED COST-$14,283,119) 14,283,119
-----------
TOTAL INVESTMENTS-99.7%
(AMORTIZED COST-
$91,117,720) 91,117,720
OTHER ASSETS &
LIABILITIES-0.3% 296,823
-----------
NET ASSETS-100.0% $91,414,543
===========
SEE NOTES TO FINANCIAL STATEMENTS.
67
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998 DISCOVERY PASSPORT FRONTIER
(In Thousands) FUND FUND FUND
--------- -------- --------
ASSETS
Investment securities, at market
(cost $191,141, $93,678, $115,655,
$197,630, $15,780, $211,650,
$1,914,512, $467,467, $1,162,432,
$14,136, and $91,118,
respectively)...................... $251,862 $124,280 $165,282
Cash................................. 681 380 453
Foreign currency (cost $127, $8, and
$2,799 respectively)............... 0 128 0
Receivables:
Investment securities sold......... 75 0 3,142
Capital shares sold................ 3,277 146 723
Dividends and interest............. 0 59 12
Other assets......................... 0 13 0
--------- -------- --------
Total Assets..................... 255,895 125,006 169,612
--------- -------- --------
LIABILITIES
Payables:
Investment securities purchased.... 13,431 128 1,281
Capital shares redeemed............ 1,066 138 694
Advisory fees...................... 183 102 132
Shareholder servicing fees......... 23 8 24
Accounting fees.................... 4 2 3
Distribution fees.................. 47 31 38
Other.............................. 17 20 17
Dividends.......................... 0 5 0
--------- -------- --------
Total Liabilities................ 14,771 434 2,189
--------- -------- --------
Net Assets........................... $241,124 $124,572 $167,423
========= ======== ========
Capital shares:
Authorized (Par value $0.01 per
share)........................... 100,000 100,000 100,000
========= ======== ========
Outstanding........................ 9,894 8,342 6,565
========= ======== ========
Net Asset Value, Offering and
Redemption Price Per Share......... $24.37 $14.93 $25.50
========= ======== ========
SEE NOTES TO FINANCIAL STATEMENTS.
68
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL WORLDWIDE GOVERNMENT MONEY
SPECIAL EQUITY GROWTH GROWTH BLUE CHIP BALANCED SECURITIES MARKET
FUND FUND FUND FUND FUND FUND FUND FUND
-------- ------------- --------- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$250,268 $19,032 $275,116 $2,317,148 $537,838 $1,265,997 $ 14,873 $91,118
651 50 771 2,805 1,436 3,244 4 61
0 0 10 0 0 2,764 0 0
1,995 202 0 180,133 8,621 9,055 0 0
1,340 33 291 7,759 421 3,468 182 1,016
120 18 229 1,305 1,372 8,274 252 0
10 3 49 2 11 10 0 0
-------- ------------- --------- --------- --------- --------- ---------- --------
254,384 19,338 276,466 2,509,152 549,699 1,292,812 15,311 92,195
-------- ------------- --------- --------- --------- --------- ---------- --------
519 300 485 127,918 5,438 34,232 0 0
739 74 3,482 18,532 547 12,780 18 368
157 16 225 1,292 283 589 8 41
31 3 20 67 42 16 3 14
5 0 5 46 11 25 0 2
55 5 77 821 122 525 1 0
23 2 35 236 24 238 2 11
0 0 84 60 925 186 59 344
-------- ------------- --------- --------- --------- --------- ---------- --------
1,529 400 4,413 148,972 7,392 48,591 91 780
-------- ------------- --------- --------- --------- --------- ---------- --------
$252,855 $18,938 $272,053 $2,360,180 $542,307 $1,244,221 $15,220 $91,415
======== ============= ========= ========= ========= ========= ========== ========
180,000 100,000 100,000 400,000 400,000 500,000 20,000 1,000,000
======== ============= ========= ========= ========= ========= ========== ========
33,997 1,351 12,334 115,705 74,089 102,087 1,563 91,415
======== ============= ========= ========= ========= ========= ========== ========
$7.44 $14.03 $22.06 $20.41 $7.32 $12.19 $9.74 $1.00
======== ============= ========= ========= ========= ========= ========== ========
</TABLE>
69
<PAGE>
- ---------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1998
(In Thousands)
DISCOVERY PASSPORT FRONTIER
FUND FUND FUND
--------- -------- --------
INVESTMENT INCOME:
Income:
Dividends.......................... $ 41 $ 1,034 $ 350
Interest........................... 1,356 1,210 1,148
Foreign taxes withheld............. (2) (123) (30)
--------- -------- --------
Total Investment Income.......... 1,395 2,121 1,468
--------- -------- --------
Expenses:
Advisory fees...................... 2,169 1,317 1,847
Shareholder servicing fees......... 294 97 323
Accounting fees.................... 52 37 44
Distribution fees.................. 543 329 462
Transfer agency expenses........... 91 33 99
Registration fees.................. 27 29 27
Postage and mailing expenses....... 27 10 29
Custodian fees and expenses........ 26 94 25
Printing expenses.................. 106 41 111
Legal and audit fees............... 15 10 14
Directors' fees and expenses....... 14 9 12
Line of credit expenses............ 11 7 9
Organization expenses.............. 0 2 0
Other expenses..................... 41 17 39
--------- -------- --------
Total Expenses................... 3,416 2,032 3,041
Earnings Credits................. (43) (29) (39)
Reimbursed/Waived Expenses....... 0 0 0
Expense Offset to Broker
Commissions.................... (3) 0 (1)
--------- -------- --------
Net Expenses..................... 3,370 2,003 3,001
--------- -------- --------
Net Investment Income (Loss)....... (1,975) 118 (1,533)
--------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net Realized Gain (Loss) from
Security Transactions:
Proceeds from long-term securities
sold............................. 265,336 57,782 243,409
Proceeds from long-term U.S.
Government Obligations........... 0 0 0
Cost of securities sold............ 241,450 53,361 235,370
--------- -------- --------
Net Realized Gain (Loss) from
Security Transactions.............. 23,886 4,421 8,039
Net Realized Gain (Loss) from Foreign
Currency Transactions.............. 0 0 0
Net Change in Unrealized
Appreciation/Depreciation.......... 10,818 8,927 2,286
--------- -------- --------
Net Realized and Unrealized Gain
(Loss) on Investments and Foreign
Currency Transactions............ 34,704 13,348 10,325
--------- -------- --------
Net Increase (Decrease) in Net Assets
Resulting from Operations.......... $ 32,729 $13,466 $ 8,792
========= ======== ========
Purchases of long-term securities.... $232,192 $37,591 $183,421
========= ======== ========
Purchases of long-term U.S.
Government Obligations............. $ 0 $ 0 $ 0
========= ======== ========
SEE NOTES TO FINANCIAL STATEMENTS.
70
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL WORLDWIDE GOVERNMENT MONEY
SPECIAL EQUITY GROWTH GROWTH BLUE CHIP BALANCED SECURITIES MARKET
FUND FUND FUND FUND FUND FUND FUND FUND
- -------- ------------- --------- --------- --------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 995 $ 254 $ 3,725 $ 16,233 $ 9,000 $ 11,921 $ 0 $ 0
1,779 118 2,130 7,661 4,817 28,225 808 6,282
(57) (27) (368) (103) (168) (262) 0 0
- -------- ------------- --------- --------- --------- --------- ---------- ------
2,717 345 5,487 23,791 13,649 39,884 808 6,282
- -------- ------------- --------- --------- --------- --------- ---------- ------
2,241 190 2,935 14,122 3,423 6,446 92 569
372 40 254 799 521 200 31 183
95 4 73 503 133 273 3 27
726 48 761 5,249 1,386 2,848 35 0
120 12 105 750 160 985 9 49
32 15 27 472 28 157 17 41
37 4 25 111 49 34 3 13
52 32 161 165 73 131 4 11
138 13 94 326 181 90 11 57
22 2 22 150 36 78 2 10
19 1 20 137 36 74 1 7
14 0 0 0 0 0 0 0
0 0 0 0 0 0 0 0
52 5 47 208 84 102 4 23
- -------- ------------- --------- --------- --------- --------- ---------- ------
3,920 366 4,524 22,992 6,110 11,418 212 990
(60) (6) (48) (275) (91) (147) (5) (18)
0 (18) 0 0 0 0 (30) 0
(2) 0 (6) (5) (5) (6) 0 0
- -------- ------------- --------- --------- --------- --------- ---------- ------
3,858 342 4,470 22,712 6,014 11,265 177 972
- -------- ------------- --------- --------- --------- --------- ---------- ------
(1,141) 3 1,017 1,079 7,635 28,619 631 5,310
- -------- ------------- --------- --------- --------- --------- ---------- ------
411,038 25,222 265,423 2,757,863 1,190,148 1,590,403 0 0
0 0 0 0 254,516 669,724 12,214 0
409,878 24,856 252,945 2,507,081 1,381,037 2,194,699 11,964 0
- -------- ------------- --------- --------- --------- --------- ---------- ------
1,160 366 12,478 250,782 63,627 65,428 250 0
0 0 0 0 (58) (131) 0 0
(1,755) 2,094 13,892 202,198 18,228 53,472 407 0
- -------- ------------- --------- --------- --------- --------- ---------- ------
(595) 2,460 26,370 452,980 81,797 118,769 657 0
- -------- ------------- --------- --------- --------- --------- ---------- ------
($ 1,736) $ 2,463 $ 27,387 $ 454,059 $ 89,432 $ 147,388 $ 1,288 $5,310
======== ============= ========= ========= ========= ========= ========== ======
$389,552 $27,018 $228,752 $3,063,175 $1,209,536 $1,675,564 $ 0 $ 0
======== ============= ========= ========= ========= ========= ========== ======
$ 0 $ 0 $ 0 $ 0 $ 156,572 $ 773,317 $ 13,527 $ 0
======== ============= ========= ========= ========= ========= ========== ======
</TABLE>
71
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DISCOVERY PASSPORT
FUND FUND
----------------------- -----------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
(In Thousands) 12/31/98 12/31/97 12/31/98 12/31/97
---------- --------- ---------- ---------
OPERATIONS
<S> <C> <C> <C> <C>
Net Investment Income (Loss)......... $ (1,975) $ (1,337) $ 118 $ 366
Net Realized Gain (Loss) from
Security Transactions.............. 23,886 26,135 4,421 2,855
Net Realized Gain (Loss) from Foreign
Currency Transactions.............. 0 0 0 (144)
Net Change in Unrealized
Appreciation/Depreciation.......... 10,818 243 8,927 1,747
---------- --------- ---------- ---------
Net Increase (Decrease) in Net
Assets Resulting from
Operations....................... 32,729 25,041 13,466 4,824
---------- --------- ---------- ---------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS
From Net Investment Income........... 0 0 (84) (241)
From Net Realized Gains (Losses) from
Security Transactions and Foreign
Currency Transactions.............. (19,443) (32,226) (3,150) (4,261)
In Excess of Net Investment Income... 0 0 0 0
---------- --------- ---------- ---------
Net Decrease from Dividends and
Distributions.................... (19,443) (32,226) (3,234) (4,502)
---------- --------- ---------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from Shares Sold............ 167,199 222,480 134,188 127,954
Reinvested Distributions............. 16,296 28,758 2,993 4,246
---------- --------- ---------- ---------
183,495 251,238 137,181 132,200
Cost of Shares Redeemed.............. (201,938) (245,266) (145,487) (187,797)
---------- --------- ---------- ---------
Net Increase (Decrease) from
Capital Share Transactions....... (18,443) 5,972 (8,306) (55,597)
---------- --------- ---------- ---------
Net Increase (Decrease) in Net
Assets........................... (5,157) (1,213) 1,926 (55,275)
NET ASSETS
Beginning of year.................. 246,281 247,494 122,646 177,921
---------- --------- ---------- ---------
End of year........................ $ 241,124 $ 246,281 $ 124,572 $ 122,646
========== ========= ========== =========
Net Assets consist of:
Capital (par value and paid-in
surplus)........................... $ 174,223 $ 194,640 $ 93,013 $ 101,319
Accumulated undistributed
(distribution in excess of ) net
investment income.................. 0 0 21 (13)
Accumulated undistributed net
realized gain (loss) from security
transactions....................... 6,180 1,738 936 (335)
Unrealized appreciation
(depreciation) on investments and
foreign currency transactions...... 60,721 49,903 30,602 21,675
---------- --------- ---------- ---------
Total.............................. $ 241,124 $ 246,281 $ 124,572 $ 122,646
========== ========= ========== =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
72
<PAGE>
<TABLE>
<CAPTION>
FRONTIER SPECIAL INTERNATIONAL WORLDWIDE
FUND FUND EQUITY FUND GROWTH FUND
------------------------ ------------------------ ----------------------- ------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97
---------- --------- ---------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ (1,533) $ (2,352) $ (1,141) $ (163) $ 3 $ (30) $ 1,017 $ 598
8,039 46,906 1,160 44,201 366 1,768 12,478 41,279
0 (6) 0 (131) 0 (8) 0 (327)
2,286 (34,125) (1,755) 4,371 2,094 169 13,892 (7,643)
---------- --------- ---------- --------- ---------- -------- ---------- ---------
8,792 10,423 (1,736) 48,278 2,463 1,899 27,387 33,907
---------- --------- ---------- --------- ---------- -------- ---------- ---------
0 0 0 0 0 0 (1,077) (503)
(21,834) (40,788) (4,577) (42,213) (92) (1,945) (11,626) (37,829)
0 0 0 0 0 0 (8) 0
---------- --------- ---------- --------- ---------- -------- ---------- ---------
(21,834) (40,788) (4,577) (42,213) (92) (1,945) (12,711) (38,332)
---------- --------- ---------- --------- ---------- -------- ---------- ---------
48,255 79,622 90,913 49,936 15,361 12,336 152,229 120,759
20,679 39,544 4,278 40,236 87 1,835 11,598 34,492
---------- --------- ---------- --------- ---------- -------- ---------- ---------
68,934 119,166 95,191 90,172 15,448 14,171 163,827 155,251
(110,573) (217,558) (156,209) (139,886) (14,621) (8,504) (215,327) (184,028)
---------- --------- ---------- --------- ---------- -------- ---------- ---------
(41,639) (98,392) (61,018) (49,714) 827 5,667 (51,500) (28,777)
---------- --------- ---------- --------- ---------- -------- ---------- ---------
(54,681) (128,757) (67,331) (43,649) 3,198 5,621 (36,824) (33,202)
222,104 350,861 320,186 363,835 15,740 10,119 308,877 342,079
---------- --------- ---------- --------- ---------- -------- ---------- ---------
$167,423 $ 222,104 $252,855 $ 320,186 $ 18,938 $15,740 $ 272,053 $ 308,877
========== ========= ========== ========= ========== ======== ========== =========
$114,100 $ 157,275 $199,284 $ 261,451 $ 15,489 $14,662 $ 206,387 $ 257,880
0 0 0 (7) 3 (1) 0 60
3,696 17,488 933 4,349 194 (79) 2,200 1,363
49,627 47,341 52,638 54,393 3,252 1,158 63,466 49,574
---------- --------- ---------- --------- ---------- -------- ---------- ---------
$167,423 $ 222,104 $252,855 $ 320,186 $ 18,938 $15,740 $ 272,053 $ 308,877
========== ========= ========== ========= ========== ======== ========== =========
</TABLE>
73
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GROWTH BLUE CHIP
FUND FUND
------------------------ -----------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
(In Thousands) 12/31/98 12/31/97 12/31/98 12/31/97
----------- --------- ----------- --------
OPERATIONS
<S> <C> <C> <C> <C>
Net Investment Income (Loss)......... $ 1,079 $ 7,133 $ 7,635 $10,068
Net Realized Gain (Loss) from
Security Transactions.............. 250,782 245,306 63,627 86,064
Net Realized Gain (Loss) from Foreign
Currency
Transactions....................... 0 (110) (58) (389)
Net Change in Unrealized
Appreciation/Depreciation.......... 202,198 60,215 18,228 1,134
----------- --------- ----------- --------
Net Increase (Decrease) in Net
Assets Resulting from
Operations....................... 454,059 312,544 89,432 96,877
----------- --------- ----------- --------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS
From Net Investment Income........... (1,079) (7,078) (7,779) (10,159)
From Net Realized Gains (Losses) from
Security Transactions and Foreign
Currency Transactions.............. (124,570) (234,890) (48,265 (101,087)
In Excess of Net Investment Income... (86) 0 (51) 0
----------- --------- ----------- --------
Net Decrease from Dividends and
Distributions.................... (125,735) (241,968) (56,095) (111,246)
----------- --------- ----------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from Shares Sold............ 839,972 847,812 78,226 71,377
Reinvested Distributions............. 119,172 227,189 49,402 99,124
----------- --------- ----------- --------
959,144 1,075,001 127,628 170,501
Cost of Shares Redeemed.............. (684,737) (506,451) (161,826) (148,830)
----------- --------- ----------- --------
Net Increase (Decrease) from
Capital Share Transactions....... 274,407 568,550 (34,198) 21,671
----------- --------- ----------- --------
Net Increase (Decrease) in Net
Assets........................... 602,731 639,126 (861) 7,302
NET ASSETS
Beginning of year.................. 1,757,449 1,118,323 543,168 535,866
----------- --------- ----------- --------
End of year........................ $2,360,180 $1,757,449 $ 542,307 $543,168
=========== ========= =========== ========
Net Assets consist of:
Capital (par value and paid-in
surplus)........................... $1,818,815 $1,544,408 $ 453,452 $487,653
Accumulated undistributed
(distribution in excess of ) net
investment income.................. (2) 0 0 145
Accumulated undistributed net
realized gain (loss) from
security transactions.............. 138,730 12,603 18,484 3,226
Unrealized appreciation
(depreciation) on investments and
foreign currency transactions...... 402,637 200,438 70,371 52,144
----------- --------- ----------- --------
Total.............................. $2,360,180 $1,757,449 $ 542,307 $543,168
=========== ========= =========== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
74
<PAGE>
<TABLE>
<CAPTION>
BALANCED GOVERNMENT MONEY MARKET
FUND SECURITIES FUND FUND
------------------------ ------------------------ --------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97
----------- -------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 28,619 $20,971 $ 631 $ 692 $ 5,310 $ 5,827
65,428 57,332 250 43 0 0
(131) (263) 0 0 0 0
53,472 32,318 407 270 0 0
----------- -------- ----------- -------- ----------- ----------
147,388 110,358 1,288 1,005 5,310 5,827
----------- -------- ----------- -------- ----------- ----------
(28,641) (21,476) (630) (692) (5,310) (5,856)
(42,393) (59,093) 0 0 0 0
(149) 0 0 0 0 0
----------- -------- ----------- -------- ----------- ----------
(71,183) (80,569) (630) (692) (5,310) (5,856)
----------- -------- ----------- -------- ----------- ----------
527,902 697,431 20,731 7,807 235,921 258,171
69,523 78,264 560 636 4,960 5,405
----------- -------- ----------- -------- ----------- ----------
597,425 775,695 21,291 8,443 240,881 263,576
(372,099) (257,690) (19,988) (10,687) (255,539) (267,340)
----------- -------- ----------- -------- ----------- ----------
225,326 518,005 1,303 (2,244) (14,658) (3,764)
----------- -------- ----------- -------- ----------- ----------
301,531 547,794 1,961 (1,931) (14,658) (3,793)
942,690 394,896 13,259 15,190 106,073 109,866
----------- -------- ----------- -------- ----------- ----------
$1,244,221 $942,690 $15,220 $13,259 $ 91,415 $106,073
=========== ======== =========== ======== =========== ==========
$1,112,851 $887,526 $17,504 $16,201 $ 91,413 $106,071
0 23 6 5 3 2
27,805 5,048 (3,028) (3,278) (1) 0
103,565 50,093 738 331 0 0
----------- -------- ----------- -------- ----------- ----------
$1,244,221 $942,690 $15,220 $13,259 $ 91,415 $106,073
=========== ======== =========== ======== =========== ==========
</TABLE>
75
<PAGE>
- ----------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Per Share Income and Capital Changes
Selected data for each share of capital stock
outstanding throughout each period.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
-------------------------------------- LESS DIVIDENDS AND
NET REALIZED DISTRIBUTIONS
NET & UNREALIZED ---------------------
NAV INVESTMENT GAIN/(LOSS) TOTAL FROM FROM NET FROM NET
BEGINNING INCOME OR ON INVESTMENT INVESTMENT REALIZED
OF PERIOD (LOSS) SECURITIES OPERATIONS INCOME* GAINS
<S> <C> <C> <C> <C> <C> <C>
--------- -------------------------------------- ---------------------
DISCOVERY FUND
Year ended 12/31/98........... $ 23.45 (0.07) 3.15 3.08 0.00 (2.16)
Year ended 12/31/97........... 24.22 0.07 2.69 2.76 0.00 (3.53)
Year ended 12/31/96........... 21.70 (0.20) 4.72 4.52 0.00 (2.00)
Year ended 12/31/95........... 19.88 (0.12) 6.29 6.17 0.00 (4.35)
Year ended 12/31/94........... 21.55 (0.12) (1.55) (1.67) 0.00 0.00
PASSPORT FUND
Year ended 12/31/98........... $ 13.64 0.00 1.68 1.68 (0.01) (0.38)
Year ended 12/31/97........... 13.91 0.02 0.22 0.24 (0.03) (0.48)
Year ended 12/31/96........... 11.68 0.04 2.30 2.34 (0.02) (0.09)
Year ended 12/31/95........... 9.42 0.04 2.26 2.30 (0.04) 0.00
Year ended 12/31/94........... 10.53 0.02 (1.11) (1.09) (0.02) 0.00
FRONTIER FUND
Year ended 12/31/98........... $ 27.99 0.06 1.01 1.07 0.00 (3.56)
Year ended 12/31/97........... 32.34 (0.15) 1.90 1.75 0.00 (6.10)
Year ended 12/31/96........... 31.08 (0.15) 4.46 4.31 0.00 (3.05)
Year ended 12/31/95........... 26.50 (0.02) 9.76 9.74 0.00 (5.16)
Year ended 12/31/94........... 27.94 (0.07) (0.72) (0.79) 0.00 (0.65)
SPECIAL FUND
Year ended 12/31/98........... $ 7.72 (0.03) (0.11) (0.14) 0.00 (0.14)
Year ended 12/31/97........... 7.66 0.01 1.21 1.22 0.00 (1.16)
Year ended 12/31/96........... 7.05 (0.02) 1.09 1.07 0.00 (0.46)
Year ended 12/31/95........... 7.01 0.00 1.79 1.79 0.00 (1.75)
Year ended 12/31/94........... 7.67 (0.02) (0.36) (0.38) 0.00 (0.28)
INTERNATIONAL EQUITY FUND
Year ended 12/31/98........... $ 12.05 0.03 2.02 2.05 0.00 (0.07)
Year ended 12/31/97........... 11.86 (0.01) 1.89 1.88 0.00 (1.69)
Year ended 12/31/96........... 10.00 (0.01) 1.87 1.86 0.00 0.00
12/29/95 (inception) to
12/31/95.................... 10.00 0.00 0.00 0.00 0.00 0.00
WORLDWIDE GROWTH FUND
Year ended 12/31/98........... $ 21.11 0.08 1.90 1.98 (0.09) (0.94)
Year ended 12/31/97........... 21.79 0.02 2.22 2.24 (0.04) (2.88)
Year ended 12/31/96........... 19.87 0.10 2.64 2.74 (0.07) (0.75)
Year ended 12/31/95........... 17.09 0.09 3.43 3.52 (0.09) (0.65)
Year ended 12/31/94........... 17.94 (0.02) (0.37) (0.39) 0.00 (0.46)
</TABLE>
* Distributions In Excess of Net Investment Income for the year ended December
31, 1998 aggregated less than $0.01 on a per share basis.
# Ratio of Net Expenses to Average Net Assets reflects reductions in a Fund's
expenses through the use of brokerage commissions and custodial and transfer
agent credits. Ratio of Gross Expenses to Average Net Assets is the total of a
Fund's operating expenses before expense offset arrangements and earnings
credits divided by its average net assets for the stated period.
SEE NOTES TO FINANCIAL STATEMENTS.
76
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN/RATIOS
--------------------------------------------------------------------------------------
NET ASSETS, NET GROSS NET INVESTMENT
NAV END OF EXPENSES EXPENSES INCOME/(LOSS) PORTFOLIO
TOTAL END TOTAL PERIOD TO AVERAGE TO AVERAGE TO AVERAGE TURNOVER
DISTRIBUTIONS OF PERIOD RETURN (THOUSANDS) NET ASSETS# NET ASSETS# NET ASSETS RATE**
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------- --------- --------------------------------------------------------------------------------------
(2.16) $ 24.37 14.19 % $ 241,124 1.55% 1.57% (0.91%) 121%
(3.53) 23.45 12.00 % 246,281 1.52% 1.54% (0.55%) 90%
(2.00) 24.22 21.20 % 247,494 1.58% 1.59% (0.85%) 106%
(4.35) 21.70 31.30 % 216,623 1.58% 1.63% (0.60%) 118%
0.00 19.88 (7.8 %) 185,310 1.67% n/a (0.62%) 72%
(0.39) $ 14.93 12.50 % $ 124,572 1.52% 1.54% 0.09% 34%
(0.51) 13.64 1.70 % 122,646 1.53% 1.55% 0.20% 51%
(0.11) 13.91 20.05 % 177,921 1.57% 1.59% 0.40% 58%
(0.04) 11.68 24.39 % 49,922 1.76% 1.84% 0.60% 37%
(0.02) 9.42 (10.4 %) 16,443 1.88% n/a 0.12% 78%
(3.56) $ 25.50 5.43 % $ 167,423 1.62% 1.65% (0.83%) 112%
(6.10) 27.99 6.20 % 222,104 1.54% 1.57% (0.91%) 54%
(3.05) 32.34 14.34 % 350,861 1.52% 1.53% (0.47%) 85%
(5.16) 31.08 37.00 % 331,720 1.53% 1.57% (0.07%) 92%
(0.65) 26.50 (2.8 %) 247,113 1.62% n/a (0.25%) 72%
(0.14) $ 7.44 (1.73 %) $ 252,855 1.33% 1.35% (0.39%) 152%
(1.16) 7.72 16.40 % 320,186 1.30% 1.32% (0.05%) 110%
(0.46) 7.66 15.33 % 363,835 1.34% 1.36% (0.28%) 186%
(1.75) 7.05 25.70 % 388,754 1.29% 1.35% 0.00% 263%
(0.28) 7.01 (4.9 %) 299,190 1.36% n/a (0.27%) 272%
(0.07) $ 14.03 17.01 % $ 18,938 1.80%+ 1.83%+ 0.02%+ 148%
(1.69) 12.05 16.10 % 15,740 1.85%+ 1.89%+ (0.21%)+ 164%
0.00 11.86 18.60 % 10,119 1.94%+ 2.00%+ (0.15%)+ 71%
0.00 10.00 0.00 % 767 n/a n/a n/a n/a
(1.03) $ 22.06 9.63 % $ 272,053 1.47% 1.49% 0.33% 86%
(2.92) 21.11 10.60 % 308,877 1.45% 1.47% 0.18% 82%
(0.82) 21.79 13.95 % 342,079 1.53% 1.55% 0.50% 72%
(0.74) 19.87 20.63 % 228,595 1.56% 1.65% 0.61% 54%
(0.46) 17.09 (2.2 %) 104,044 1.66% n/a (0.14%) 87%
</TABLE>
** Portfolio Turnover Rate is a measure of portfolio activity that is
calculated by dividing the lesser of purchases or sales of securities,
excluding securities having maturity dates at acquisition of one year or
less, by the average value of the portfolio securities held during the
period, which is a rolling 12-month period.
+ Certain fees were reimbursed by the management company. Had these fees not
been reimbursed, the net expense ratios would have been 1.89% (1998), 2.01%
(1997) and 2.46% (1996) for International Equity Fund. The gross expense
ratios would have been 1.92% (1998), 2.05% (1997) and 2.52% (1996) for
International Equity Fund. The net investment income ratios would have been
(0.07%) (1998), (0.37%) (1997) and (0.67%) (1996).
n/a Disclosure not applicable or not required in prior periods.
77
<PAGE>
- ----------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
Per Share Income and Capital Changes
Selected data for each share of capital stock
outstanding throughout each period.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
-------------------------------------- LESS DIVIDENDS AND
NET REALIZED DISTRIBUTIONS
NET & UNREALIZED ---------------------
NAV INVESTMENT GAIN/(LOSS) TOTAL FROM FROM NET FROM NET
BEGINNING INCOME OR ON INVESTMENT INVESTMENT REALIZED
OF PERIOD (LOSS) SECURITIES OPERATIONS INCOME* GAINS
<S> <C> <C> <C> <C> <C> <C>
--------- -------------------------------------- ---------------------
GROWTH FUND
Year ended 12/31/98........... $ 17.28 0.01 4.26 4.27 (0.01) (1.13)
Year ended 12/31/97........... 15.87 0.07 4.09 4.16 (0.07) (2.68)
Year ended 12/31/96........... 14.77 0.02 2.40 2.42 (0.02) (1.30)
Year ended 12/31/95........... 11.63 0.02 5.27 5.29 (0.02) (2.13)
Year ended 12/31/94........... 12.38 (0.02) (0.39) (0.41) 0.00 (0.34)
BLUE CHIP FUND
Year ended 12/31/98........... $6.92 0.71 0.51 1.22 (0.11) (0.71)
Year ended 12/31/97........... 7.23 0.13 1.25 1.38 (0.13) (1.56)
Year ended 12/31/96........... 6.69 0.09 1.52 1.61 (0.09) (0.98)
Year ended 12/31/95........... 6.16 0.09 1.70 1.79 (0.09) (1.17)
Year ended 12/31/94........... 6.49 0.06 (0.02) 0.04 (0.06) (0.31)
BALANCED FUND
Year ended 12/31/98........... $ 11.35 0.30 1.27 1.57 (0.30) (0.43)
Year ended 12/31/97........... 10.61 0.29 1.48 1.77 (0.30) (0.73)
Year ended 12/31/96........... 9.58 0.28 1.50 1.78 (0.27) (0.48)
Year ended 12/31/95........... 8.56 0.28 2.21 2.49 (0.28) (1.19)
Year ended 12/31/94........... 8.93 0.20 (0.37) (0.17) (0.20) 0.00
GOVERNMENT SECURITIES FUND
Year ended 12/31/98........... $9.28 0.43 0.46 0.89 (0.43) 0.00
Year ended 12/31/97........... 9.04 0.45 0.24 0.69 (0.45) 0.00
Year ended 12/31/96........... 9.29 0.46 (0.25) 0.21 (0.46) 0.00
Year ended 12/31/95........... 8.78 0.45 0.51 0.96 (0.45) 0.00
Year ended 12/31/94........... 10.02 0.52 (1.26) (0.74) (0.50) 0.00
MONEY MARKET FUND
Year ended 12/31/98........... $1.00 0.05 0.00 0.05 (0.05) 0.00
Year ended 12/31/97........... 1.00 0.05 0.00 0.05 (0.05) 0.00
Year ended 12/31/96........... 1.00 0.05 0.00 0.05 (0.05) 0.00
Year ended 12/31/95........... 1.00 0.05 0.00 0.05 (0.05) 0.00
Year ended 12/31/94........... 1.00 0.03 0.00 0.03 (0.03) 0.00
</TABLE>
* Distributions In Excess of Net Investment Income for the year ended December
31, 1998 aggregated less than $0.01 on a per share basis.
# Ratio of Net Expenses to Average Net Assets reflects reductions in a Fund's
expenses through the use of brokerage commissions and custodial and transfer
agent credits. Ratio of Gross Expenses to Average Net Assets is the total of a
Fund's operating expenses before expense offset arrangements and earnings
credits divided by its average net assets for the stated period.
SEE NOTES TO FINANCIAL STATEMENTS.
78
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN/RATIOS
--------------------------------------------------------------------------------------
NET ASSETS, NET GROSS NET INVESTMENT
NAV END OF EXPENSES EXPENSES INCOME/(LOSS) PORTFOLIO
TOTAL END TOTAL PERIOD TO AVERAGE TO AVERAGE TO AVERAGE TURNOVER
DISTRIBUTIONS OF PERIOD RETURN (THOUSANDS) NET ASSETS# NET ASSETS# NET ASSETS RATE**
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------- --------- --------------------------------------------------------------------------------------
(1.14) $ 20.41 25.04% $2,360,180 1.08% 1.10% 0.05% 143%
(2.75) 17.28 26.60% 1,757,449 1.10% 1.12% 0.48% 189%
(1.32) 15.87 16.57% 1,118,323 1.19% 1.20% 0.15% 134%
(2.15) 14.77 45.59% 655,927 1.24% 1.28% 0.12% 130%
(0.34) 11.63 (3.4%) 307,988 1.33% n/a (0.17%) 172%
(0.82) $7.32 17.78% $542,307 1.08% 1.10% 1.38% 259%
(1.69) 6.92 19.40% 543,168 1.09% 1.11% 1.84% 256%
(1.07) 7.23 24.37% 535,866 1.15% 1.16% 1.40% 195%
(1.26) 6.69 29.06% 375,200 1.17% 1.22% 1.19% 235%
(0.37) 6.16 0.50% 311,051 1.21% n/a 0.88% 239%
(0.73) $12.19 13.96% $1,244,221 0.99% 1.00% 2.51% 211%
(1.03) 11.35 16.90% 942,690 0.99% 1.01% 2.77% 203%
(0.75) 10.61 18.76% 394,896 1.10% 1.12% 3.09% 146%
(1.47) 9.58 29.40% 130,346 1.19% 1.23% 2.92% 286%
(0.20) 8.56 (1.9%) 95,226 1.26% n/a 2.37% 258%
(0.43) $9.74 9.76% $15,220 1.25%+ 1.28%+ 4.46%+ 90%
(0.45) 9.28 7.90% 13,259 1.26%+ 1.31%+ 4.99%+ 147%
(0.46) 9.04 2.34% 15,190 1.26%+ 1.29%+ 5.06%+ 166%
(0.45) 9.29 11.10% 20,263 1.30% 1.30% 4.92% 141%
(0.50) 8.78 (7.5%) 21,323 1.34% n/a 5.52% 379%
(0.05) $1.00 4.67% $91,415 0.85% 0.87% 4.67% n/a
(0.05) 1.00 4.70% 106,073 0.82% 0.84% 4.77% n/a
(0.05) 1.00 4.51% 109,866 0.86% 0.88% 4.58% n/a
(0.05) 1.00 5.10% 125,646 0.89% 0.89% 5.11% n/a
(0.03) 1.00 3.40% 201,342 0.91% n/a 3.49% n/a
</TABLE>
** Portfolio Turnover Rate is a measure of portfolio activity that is
calculated by dividing the lesser of purchases or sales of securities,
excluding securities having maturity dates at acquisition of one year or
less, by the average value of the portfolio securities held during the
period which is a rolling 12-month period.
+ Certain fees were waived by the management company. Had these fees not been
waived, the net expense ratios would have been 1.46% (1998), 1.44% (1997) and
1.46% (1996) for Government Securities Fund. The gross expense ratios would
have been 1.49% (1998), 1.49% (1997) and 1.49% (1996) for Government
Securities Fund. The net investment income ratios would have been 4.25%
(1998), 4.81% (1997) and 4.86% (1996).
n/a Disclosure not applicable or not required in prior periods.
79
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Founders Funds, Inc. (the "Funds") is a diversified open-end management
investment company registered under the Investment Company Act of 1940. Eleven
series of shares are currently issued: Discovery, Passport, Frontier, Special,
International Equity, Worldwide Growth, Growth, Blue Chip, Balanced, Government
Securities, and Money Market Funds (individually a "Fund"). The following
significant accounting policies have been consistently followed by the Funds in
the preparation of their financial statements.
SECURITIES VALUATION--With the exception of Money Market Fund, market value of
investments is determined from closing quotations on national security exchanges
or at the last current bid price in the case of securities traded
over-the-counter or by quotes from dealers making a market for securities not
listed on an exchange or traded over-the-counter. In the event that the closing
price of a foreign security is not available in time to calculate a Fund's net
asset value on a particular day, the Funds' board of directors has authorized
the use of the market price for the security obtained from an approved pricing
service at an established time during the day which may be prior to the close of
regular trading in the security. If market quotations are not readily available,
securities will be valued at their fair values as determined in good faith by
the Funds' board of directors or pursuant to procedures approved by the board of
directors. London closing quotes for exchange rates are used to convert foreign
security values into U.S. dollars. Short-term securities, with maturities of
less than 60 days, and all securities held by Money Market Fund, are valued at
amortized cost, which approximates market.
FOREIGN SECURITIES--Foreign securities may carry more risk than U.S.
securities, such as political, market, and currency risks. All of the Funds may
invest at least a portion of their assets in foreign securities. In the event
that a Fund executes a foreign security transaction, the Fund will enter into a
foreign currency contract to settle the foreign security transaction. The
resultant foreign currency gain or loss from the contract is recorded as foreign
currency gain or loss and is presented as such in the Statements of Operations.
Foreign currency held at December 31, 1998 for settling foreign trades is listed
on the Statements of Assets and Liabilities.
FEDERAL INCOME TAXES--No provision has been made for federal income taxes
since it is the policy of the Funds to comply with the special provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies, and to make distributions of income and capital gains sufficient to
relieve it from all income taxes. Each Fund is treated as a separate tax entity
for federal income tax purposes.
INVESTMENT INCOME--Dividend income is recorded on the ex-dividend date.
Certain dividends from foreign securities will be recorded as soon as the Fund
is informed of the dividend if such information is obtained subsequent to the
ex-dividend date. Interest income is accrued daily and includes the accretion of
discounts and the amortization of premiums.
DISTRIBUTIONS TO SHAREHOLDERS--For Government Securities and Money Market
Funds, distributions are declared daily and paid monthly from net investment
income, and capital gains (if any) are distributed annually. For Balanced Fund,
distributions from income are declared and distributed quarterly and capital
gains (if any) are distributed annually. All other Funds declare and distribute
dividends and capital gains (if any) annually. All distributions are recorded on
the ex-dividend date.
EXPENSES--Each of the Funds bears expenses incurred specifically on its behalf
and, in addition, each Fund bears a portion of general expenses based on the
relative net assets, or number of shareholder
80
<PAGE>
accounts of each Fund. The type of expense determines the allocation method.
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
OTHER--Security transactions are recorded on the date the securities are
purchased or sold (trade date).
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
In accordance with the investment advisory agreements between the Funds and
Founders Asset Management LLC ("Founders"), the Funds compensate Founders for
its services as investment adviser by the payment of fees computed daily and
paid monthly at the annual rate equal to a percentage of the average daily value
of the Funds' net assets. For Discovery, Passport, Frontier, International
Equity and Worldwide Growth Funds, the fee is 1% of the first $250 million of
net assets, 0.80% of the next $250 million of net assets, and 0.70% of net
assets in excess of $500 million. For Special and Growth Funds, the fee is 1% of
the first $30 million of net assets, 0.75% of the next $270 million of net
assets, 0.70% of the next $200 million of net assets and 0.65% of net assets in
excess of $500 million. For Blue Chip and Balanced Funds, the fee is 0.65% of
the first $250 million of net assets, 0.60% of the next $250 million of net
assets, 0.55% of the next $250 of net assets and 0.50% of net assets in excess
of $750 million. For Government Securities Fund, the fee is 0.65% of the first
$250 million of net assets, and 0.50% of the net assets in excess of $250
million. For Money Market Fund, the fee is 0.50% of the first $250 million of
net assets, 0.45% of the next $250 million of net assets, 0.40% of the next $250
million of net assets, and 0.35% of the net assets in excess of $750 million.
Founders limits International Equity Fund's expenses to 1.80% of average net
assets. For the year ended December 31, 1998, $17,849 was reimbursed to the
Fund.
Investors Fiduciary Trust Company ("IFTC") is the designated shareholder
accounting, transfer and dividend disbursing agent for each Fund. With the
exception of out-of-pocket charges, the fees charged by IFTC are paid by
Founders. The out-of-pocket charges from IFTC are paid by the Funds. IFTC also
serves as custodian for the Funds. The fees for the custody services are subject
to reduction by credits earned on the cash balances of the Funds held by IFTC as
custodian.
The Funds have agreed to compensate Founders for providing certain shareholder
servicing functions in addition to those currently provided by IFTC. The Funds
paid Founders a monthly fee equal on an annual basis to $26.00 per shareholder
account of the Funds considered to be an open account at any time during a given
month.
The Funds have also agreed to compensate Founders for providing accounting
services, administration, compliance monitoring, regulatory and shareholder
reporting, as well as facilities, equipment and clerical help as shall be
necessary to provide these services to the Funds. The fee is computed at the
annual rate of 0.06% of the average daily net assets of the Funds from $0 to
$500 million and 0.02% of the net assets of the Funds in excess of $500 million.
The fee so computed is allocated to each Fund on a pro rata basis based on
relative average daily net assets.
Discovery, Passport, Frontier, Special, International Equity, Worldwide
Growth, Growth, Blue Chip, Balanced, and Government Securities Funds each have
adopted a Distribution Plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940. Each plan provides that the
81
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund may pay distribution expenses of up to 0.25% each year on its average daily
net assets. During the year, Founders elected not to collect the full 0.25% from
the Government Securities Fund and waived $30,166, which resulted in the Fund
paying 0.04% under the plan.
Certain shareholders of the Funds are also officers and/or directors of
Founders.
Founders serves as investment adviser to each of the Funds. Founders is a
90%-owned subsidiary of Mellon Bank, N.A., with the remaining 10% held by
certain Founders executives and portfolio managers. Mellon Bank, N.A. is a
wholly-owned subsidiary of Mellon Bank Corporation, a publicly-owned multibank
holding company which provides a comprehensive range of financial products and
services in domestic and selected international markets. The affairs of the
Funds, including services provided by Founders, are subject to the supervision
and general oversight of the Funds' board of directors.
3. FEDERAL INCOME TAXES
Net investment income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are due to differing
treatments for items such as deferral of wash sales, foreign currency
transactions, net operating losses, and capital loss carryforwards. Permanent
items identified in the period ended December 31, 1998 have been reclassified
among the components of net assets as follows:
<TABLE>
<CAPTION>
UNDISTRIBUTED UNDISTRIBUTED
NET INVESTMENT NET REALIZED PAID-IN
INCOME GAINS AND LOSSES CAPITAL
-------------- ---------------- ----------
<S> <C> <C> <C>
Discovery Fund.......................... $1,975,590 $ (1,266) $(1,974,324)
Passport Fund........................... 0 0 0
Frontier Fund........................... 1,533,293 2,956 (1,536,249)
Special Fund............................ 1,147,932 1,149 (1,149,081)
International Equity Fund............... 0 (4) 4
Worldwide Growth Fund................... 7,753 (15,081) 7,328
Growth Fund............................. 83,709 (83,264) (445)
Blue Chip Fund.......................... 50,765 (47,824) (2,941)
Balanced Fund........................... 148,830 (147,963) (867)
Government Securities Fund.............. 0 0 0
Money Market Fund....................... 999 (999) 0
</TABLE>
82
<PAGE>
Net capital loss carryovers and post-October 31 capital losses noted below, if
any, as of December 31, 1998, are available to offset future realized capital
gains and thereby reduce future taxable gains distributions. Post-October 31
foreign currency losses noted below, if any, will offset future net investment
income and thereby reduce future ordinary income distributions. The capital loss
carryover for the Government Securities Fund expires in the years 2002 through
2004. Net capital loss carryovers utilized in 1998 by the Government Securities
Fund amounted to $249,768. The aggregate cost of investments and the composition
of unrealized appreciation and depreciation of investment securities for federal
income tax purposes as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
POST- POST-
NET OCTOBER OCTOBER
CAPITAL CAPITAL CURRENCY FEDERAL
LOSS LOSS LOSS TAX UNREALIZED UNREALIZED
CARRYOVERS DEFERRAL DEFERRAL COST APPRECIATION (DEPRECIATION)
---------- -------- -------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Discovery Fund.......................... $ 0 $ 0 $ 0 $191,303,770 $66,438,769 $(5,880,480)
Passport Fund........................... 0 0 0 93,678,203 36,549,337 (5,947,424)
Frontier Fund........................... 0 0 0 115,708,284 51,008,634 (1,434,531)
Special Fund............................ 0 0 0 197,928,274 59,978,110 (7,637,913)
International Equity
Fund.................................. 0 0 (871) 15,884,705 3,688,755 (541,412)
Worldwide Growth
Fund.................................. 0 0 0 211,786,516 68,737,470 (5,407,613)
Growth Fund............................. 0 0 (196,022) 1,914,511,545 443,760,679 (41,123,746)
Blue Chip
Fund.................................. 0 0 0 468,078,389 79,872,934 (10,113,293)
Balanced
Fund.................................. 0 0 0 1,163,541,354 117,512,754 (15,056,887)
Government Securities Fund.............. 3,028,597 0 0 14,135,644 739,343 (1,589)
Money Market Fund....................... 999 (2,868) 0 91,117,720 0 0
<CAPTION>
NET
APPRECIATION/
(DEPRECIATION)
--------------
<S> <C>
Discovery Fund.......................... $60,558,289
Passport Fund........................... 30,601,913
Frontier Fund........................... 49,574,103
Special Fund............................ 52,340,197
International Equity
Fund.................................. 3,147,343
Worldwide Growth
Fund.................................. 63,329,857
Growth Fund............................. 402,636,933
Blue Chip
Fund.................................. 69,759,641
Balanced
Fund.................................. 102,455,867
Government Securities Fund.............. 737,754
Money Market Fund....................... 0
</TABLE>
83
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FUND SHARE TRANSACTIONS
Transactions in shares of the Funds for the periods indicated were as follows
(in thousands):
<TABLE>
<CAPTION>
REINVESTED NET INCREASE
SOLD DISTRIBUTIONS REDEEMED (DECREASE)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Discovery Fund:
Year ended 12/31/98................. 7,262 744 (8,614) (608)
Year ended 12/31/97................. 8,704 1,273 (9,695) 282
Passport Fund:
Year ended 12/31/98................. 8,672 211 (9,533) (650)
Year ended 12/31/97................. 8,876 310 (12,977) (3,791)
Frontier Fund:
Year ended 12/31/98................. 1,786 913 (4,068) (1,369)
Year ended 12/31/97................. 2,445 1,474 (6,837) (2,918)
Special Fund:
Year ended 12/31/98................. 12,202 624 (20,324) (7,498)
Year ended 12/31/97................. 5,949 5,394 (17,345) (6,002)
International Equity Fund:
Year ended 12/31/98................. 1,136 6 (1,098) 44
Year ended 12/31/97................. 939 155 (641) 453
Worldwide Growth Fund:
Year ended 12/31/98................. 6,762 550 (9,611) (2,299)
Year ended 12/31/97................. 5,206 1,665 (7,939) (1,068)
Growth Fund:
Year ended 12/31/98................. 43,696 6,112 (35,805) 14,003
Year ended 12/31/97................. 46,375 13,366 (28,515) 31,226
Blue Chip Fund:
Year ended 12/31/98................. 10,345 6,757 (21,455) (4,353)
Year ended 12/31/97................. 9,168 14,250 (19,054) 4,364
Balanced Fund:
Year ended 12/31/98................. 44,178 5,736 (30,911) 19,003
Year ended 12/31/97................. 61,542 6,889 (22,543) 45,888
Government Securities Fund:
Year ended 12/31/98................. 2,146 59 (2,071) 134
Year ended 12/31/97................. 862 70 (1,182) (250)
Money Market Fund:
Year ended 12/31/98................. 235,921 4,960 (255,539) (14,658)
Year ended 12/31/97................. 258,173 5,405 (267,340) (3,762)
</TABLE>
84
<PAGE>
5. TRANSACTIONS WITH AFFILIATES AND AFFILIATED COMPANIES
An affiliated company represents ownership by the Funds of at least 5% of the
voting securities of the issuer during the period, as defined in the Investment
Company Act of 1940. A summary of the transactions during the year ended
December 31, 1998, in which the issuer was an affiliate of the Funds, is as
follows:
<TABLE>
<CAPTION>
PURCHASES SALES REALIZED
--------------- ---------------------- DIVIDEND GAIN/(LOSS) ON VALUE AT
AFFILIATE SHARES COST SHARES COST INCOME INVESTMENTS 12/31/98
- --------------------------- ------ ---- ------- ---------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FOUNDERS DISCOVERY FUND
Cutter and Buck, Inc.... 0 $0 162,500 $2,850,730 $ 0 $1,401,316 $3,725,000
FOUNDERS BALANCED FUND
Legacy Hotels Real
Estate
Investment Trust
144A.................. 0 $0 1,593,200 $11,097,704 $155,103 $(1,844,539) $ 0
</TABLE>
6. LINE OF CREDIT
Discovery, Passport, Frontier, and Special Funds have a Line of Credit
Arrangement ("LOC") with State Street Bank and Trust Company, to be used for
extraordinary or emergency purposes, primarily for financing redemption
payments. For Discovery, Passport, and Frontier Funds, borrowings will be
limited to 10% of each Fund's net assets computed at the lesser of cost or
market value. Special Fund may borrow amounts up to 10% of the market value of
the net assets of the Fund. Combined borrowings will be subject to the $50
million cap on the total line of credit. Each Fund agrees to pay annual fees and
interest on the unpaid balance based on prevailing market rates as defined in
the line of credit. At December 31, 1998 there were no such borrowings.
85
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Founders Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the portfolios constituting
Founders Funds, Inc. (the "Fund") at December 31, 1998, the results of each of
their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above. The financial statements of the Fund for the year ended
December 31, 1995 were audited by other independent accountants whose report
dated January 26, 1996 expressed an unqualified opinion on those statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Denver, Colorado
February 8, 1999
86
<PAGE>
OTHER INFORMATION (UNAUDITED)
CORPORATE DIVIDENDS RECEIVED DEDUCTION
Dividends paid by the Funds from net investment income and distributions of net
realized short-term capital gains are, for federal income tax purposes, taxable
as ordinary income to shareholders. Of the ordinary income distributions
declared for the period ended December 31, 1998, the following amounts qualified
for the dividends received deduction available to the Funds' corporate
shareholders:
Discovery Fund...................................... 0.00%
Passport Fund....................................... 0.00%
Frontier Fund....................................... 0.00%
Special Fund........................................ 3.94%
International Equity Fund........................... 0.00%
Worldwide Growth Fund............................... 14.40%
Growth Fund......................................... 20.46%
Blue Chip Fund...................................... 13.47%
Balanced Fund....................................... 10.98%
87
<PAGE>
OTHER INFORMATION (CONTINUED) (UNAUDITED)
SHAREHOLDER VOTES
On February 17, 1998, a special meeting of the shareholders of the Funds was
held at which the shareholders of each Fund approved a new investment advisory
agreement between the Funds and Founders. The need to approve a new investment
advisory contract was caused by the change in control of Founders Asset
Management, Inc. resulting from the acquisition of Founders Asset Management,
Inc. by Mellon Bank, N.A. In addition, the shareholders elected seven directors
of the Funds. The following is a report on the votes cast :
APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENT
<TABLE>
<CAPTION>
SHARES SHARES SHARES BROKER
FUND FOR AGAINST ABSTAINING NON-VOTE
- ---------------------------------------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Discovery Fund.......................... 4,695,820.68 140,656.00 208,078.00 301.00
Passport Fund........................... 4,575,991.63 132,455.00 166,712.00 79,199.00
Frontier Fund........................... 3,341,145.54 128,864.00 203,477.82 1,698.00
Special Fund............................ 19,819,936.96 724,659.00 1,002,894.00 2,220.00
International Equity Fund............... 644,101.00 15,617.00 19,491.00 0
Worldwide Growth Fund................... 7,032,379.44 185,986.00 256,178.00 15,554.00
Growth Fund............................. 51,545,882.29 1,047,507.76 2,246,199.11 285,406.00
Blue Chip Fund.......................... 40,084,793.86 1,145,210.00 2,005,733.05 197,106.00
Balanced Fund........................... 39,166,406.25 449,081.76 3,483,822.92 51,833.09
Government Securities Fund.............. 739,717.00 39,728.00 34,423.00 0
Money Market Fund....................... 60,192,214.00 2,676,644.00 3,213,515.00 0
</TABLE>
88
<PAGE>
ELECTION OF DIRECTORS
SHARES SHARES
CANDIDATE FOR WITHHELD
- ---------------------------------------- ---------- ---------
William H. Baughn*...................... 239,649,661 12,348,985
Bjorn K. Borgen**....................... 239,767,667 12,230,978
Alan S. Danson.......................... 239,783,238 12,215,407
Trygve E. Myhren........................ 239,811,714 12,186,931
Jay A. Precourt......................... 239,821,242 12,177,403
Eugene H. Vaughan, Jr................... 239,830,284 12,168,361
Jonathan F. Zeschin*.................... 239,820,635 12,178,010
* Messrs. Baughn and Zeschin resigned as directors of the Funds on December 31,
1998 and March 31, 1998 respectively.
** Mr. Borgen elected not to stand for re-election to the Board at a special
meeting of the shareholders of the Funds scheduled to be held on March 2,
1999, and his term as a director will expire at that meeting.
89
<PAGE>
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<PAGE>
[Logo]
Founders Funds
Growth Specialists from Dreyfus
2930 East Third Avenue
Denver, CO 80206-5002
1-800-525-2440
WWW.FOUNDERS.COM
FUND DIRECTORS
Jay A. Precourt, Chairman
Eugene H. Vaughan, Jr., Vice Chairman
Bjorn K. Borgen
Alan S. Danson
Joan D. Manley
Robert P. Mastrovita
Trygve E. Myhren
George W. Phillips
This report is not authorized for distribution to prospective investors unless
preceded or accompanied
by a current prospectus for Founders Funds, Inc., which contains more complete
information, including management fees and expenses that apply to a continued
investment in the Funds. Please read the prospectus carefully before you invest
or send money.
"Dreyfus" is the umbrella designation for the investment products and services
available from affiliates of Mellon Bank Corporation, including Founders Asset
Management LLC. Founders Funds is a registered trademark and the logo is a
trademark of Founders Asset Management LLC. 1999 Founders Asset Management LLC,
Broker-Dealer. Premier Mutual Fund Services, Inc., Distributor.
Date of first use: February 26, 1999
A-624-ANN
